News
Initial situation
Geistesblitz 05/19
May 31, 2019
Initial situation
Due
to the predominantly declining EUR-USD exchange rates since January
last year, USD importers are increasingly hoping for a stronger EUR
again. Coming from 1.2513 USD / EUR, the EUR-USD exchange rate currently remains close to its low 1.1153 USD / EUR.
In
addition to the EUR-USD exchange rates, the EUR-USD volatilities are
also clearly regressing. The current level was last reached almost 5
years ago. In comparison to the peak, they were approximately halved;
for example, the 6-month ATM volatility drops from 11.7% to 5.7%.
The
combination of these two developments makes it possible to put together
at a attractive exchange rate. In this Geistesblitz, we present a
strategy for USD importers. EUR-USD exchange rate at the current
exchange rate level without any prior notice EUR-USD exchange rate.
Market overview (May 27 th 2019)
-
EUR-USD spot rate:
1,200 USD / EUR
- 6-month EUR-USD forward rate (including margin): 1.1360 USD / EUR
Shout Forward
Product description
The
importer concludes a “shout forwad” from which he acquires 2,000,000
USD in 6 months at an exchange rate of 1.1200 USD / EUR against EUR.
This is the current spot rate. In addition, the client has 50% in a
EUR-USD exchange rate above 1.1200 USD / EUR. This unlimited participation reduces the EUR amount payable by the client by the “participation amount” [1] depending on the exchange rate development.
The
opportunity at additional flexibility, because daily until maturity the
client has the opportunity to directly pay the participation at an
exchange rate. If
the client does not exercise this option during the term and if the
EUR-USD exchange rate is below the participation level at expiry, this
option terminates. The client shall be settled at a minimum interest rate of 1.1200 USD / EUR.
[1] For this purpose, the USD participation amount is converted into its EUR equivalent. The
USD participation amount is calculated as the product of the EUR-USD
exchange rate difference and the EUR participation notional. If
the EUR-USD exchange rate exceeds the participation rate at the time of
exercise, the difference between the participation rate and the
participation level is formed. Otherwise, the exchange rate difference and the USD participation amount are set at zero.
Indicative terms and conditions
- notional: 2,000,000 USD
- Maturity:
6 months
- Guaranteed rate:
1,100 USD / EUR
-
Participation level:
1,100 USD / EUR
- Participation intensity: 50% [2]
[2 ] Participation level and intensity define a EUR participation notional of 892,857 EUR (= 50% * 2,000,000 USD / 1.12 USD / EUR)
Influence of volatility on participation intensity
The
following chart shows the effect of volatility on the participation of
the intensity of the strategy and its attractiveness in the current
environment.
For
this purpose, the historical ATM volatilities of the EUR-USD exchange
rate (on a monthly basis) already shown in Figure 1 were used as
variable in the pricing of the strategy. All other influencing factors were kept constant. It could have been the current participation intensity of 50%. Since then, smaller participation intensities as low as 30% would have been possible.
Benefits and risks from the client’s perspective
Benefits:
- Hedging a minimum EUR-USD rate at current level EUR-USD spot rate.
- Unlimited participation in a rising EUR-USD exchange rate at 50% of the nominal.
- The exercise date is freely selectable during the term.
- Hedged rate is 0.0160 USD / EUR below the alternative forward rate.
- Participation in a rising EUR-USD exchange rate at 50% of the notional.
In a nutshell
The Geistesblitz “Shout Forward” shows clients paying for imports in USD a strategy how to hedge a minimum EUR-USD exchange rate at the level of the current spot. In addition, they participate at 50% in a potential EUR-USD rate without any restriction. Your client has the flexibility to pay the fee. The EUR-USD spot rate is perceived attractive.
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