25Delta FX Dynamic Virtual Program for MV Credit • Strategy #3
Notional Exposed: Usd 150MM
Benchmark: 100% hedged
Spot at inception: 1.1150
Expiry: Nov 29 2019
Forward rate at inception:1.1169
Cost of forward: 0.17% monthly
Sell EUR Call USD Put in Usd 100MM at K=1.11250, Vol 4.50%, Premium: Eur 180k
Sell Usd 150MM at Fwd rate 1.1169
Premium from options: 0.13% monthly or Eur 180k
Settlement of Strategy USD#2: Last Wednesday we closed the second strategy with alpha of 0.13% against a fixed forward. This is an Alpha of 1.5% in annualized terms.
We propose the third strategy below:
The strategy will deliver positive return against the benchmark (better settlement results) at maturity, if Spot rate terminates below 1.1275. The best return would be 0.13% for the spot at any rate below 1.1250
Should the spot hits or is close to reach strikes level of 1.1250, 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 a non-event at least initially. No Central Bank meetings in the horizon, apart from the BOE where there is no expectation of a rate move.
Markets got into a phase of risk on, as most of the macro drivers that led the direction of the USD appear to have calm down. On the Trade Tensions, it is likely that we see a signature of the small first phase document. On Brexit, after extra time provided until end of January, all eyes will be on UK elections on Dec 12th, beyond the scope of this strategy. On monetary policies, all things stand by after last week FOMC decision to cut rates and call for a kind of forward guidance.
We thing there is a need for a new catalyst in order for the EURO to break on the upper side beyond 1.1262 level acting now as monthly resistance. Positioning is bearish EURO for the majority of market and risk reversals point out accordingly to more pain in case of break up the upper side.
Levels to watch: 1.1262 & 1.1070 now resistance, and monthly pivotal point respectively.