25Delta FX Dynamic Virtual Program for MV Credit • Strategy #2
Notional Exposed: Usd 150MM
Benchmark: 100% hedged
Spot at inception: 1.0898
Expiry: Oct 30 2019
Forward rate at inception:1.0922
Cost of forward: 0.22% monthly
Sell EUR Call USD Put in Usd 75MM at K=1.1100, Vol 5.70%, Premium: Eur 89k
Sell EUR Put USD call in Usd 75MM at K= 1.0750, Vol 5.96%, Premium: Eur 108k
Sell Usd 150MM at Fwd rate 1.0922
Premium from options: 0.14% monthly or Eur 197k
Settlement of Strategy USD#1: Last Wednesday we closed the first strategy with alpha of 0.19% against a fixed forward. This is an Alpha of 2.30% in annualized terms.
We propose the second strategy below:
The strategy will deliver positive return against the benchmark (better settlement results) at maturity, if Spot rate terminates between 1.0720 and 1.1135. The best return would be 0.14% for the spot at any rate between the two breakeven points.
Should the spot reach either of the strikes levels 1.0720 or 1.1135, we will execute the first stop loss action buying/selling Usd 35MM at the forward level.
The first stop loss action could also be a reestructuring of the original options depending on the type of spot movement and other considerations given market situation at the time.
Market Situation and events ahead:
This month will be marked by the ECB meeting on Oct 24th, and the October 19th, deadline to Boris Johnson to reach an agreement or ask for a delay till end January 2020.
Markets continue to be driven by fears of a global slowdown, impacted by the commercial war, and deteriorating data specially across Europe. The Euro is under pressure, and will continue to be until we see some consolidating data.
We thing there is a new range setting up in the pair below 1.1000, and above the 1.0500 level, but the lower level still needs more negative feedback from macro data to be in sight.
Levels to watch: 1.0970-1.1070 now resistance, 1.0820-1.0700 acting as support zones.