Deutsche Bank FX Strategists are calling for USDJPY of 115 by year-end 2014,
and 120 by year-end 2015. See DB FX Blueprint published 1/9/14, and note that
#2 of the top 10 themes of 2014 (p. 5-6) revolves around extended weakness in
the Japanese Yen vs. USD.
Consider a lOyear expiry SY call option struck at 85 (spot fx 105, forward fx
77.70). Price 4.7% of USD notional
This option has four notable characteristics
If SY stays at these levels the option decays positively by approx 15-20%
per year
If SY trades 90.00 at any time (arguably a scenario in which the option is
no longer wanted) the option "knocks-out" and becomes worthless. while SY
might decline to 90, our quantitative analysis indicates the probability of
such a decline is significantly (double?) overpriced by the options market
The premium of the option is quite sensitive to moves in SY spot - which is
atypical for a lOyear option. This also results from the knockout feature.
This means if SY moves quickly by 5% the option increases / decreases in
value by almost half, so If SY rises to 110 or 115 the option can easily be
unwound to monetize the profit
The option costs roughly 1/3rd compared to the vanilla 85 strike call
Maximum loss is premium paid
(See attached file: D8 FX Blueprint - outlook 2014.pdf)
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Nav Gupta
Managing Director
Deutsche Bank AG, Filiale London
Deutsche Asset & Wealth Management
105/108 Old Broad St (Pinners Hall), EC2N lEN London, United Kingdom
Tel.
Mobi
Emai
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Tazia Smith
Director I Key Client Partners - uS
Deutsche Bank Securities Inc
Deutsche Asset & wealth Management
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New Yor.
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