(Embedded image moved to file: pic14537.gif)« 4bp is mid mkt, offer is 6bp
3) Position for a Stronger Dollar - lyear view (now or soon)
Buy ly expiry European style digital binary option on EURUSD struck 5% below
spot @ 21% of payout (which i think is too cheap)
Current strike (spot - 5%) would be 1.3120
At expiry if EuRusD has fallen by more than 5% from current levels the option
payout is EUR1mm. upfront premium is EuR210k.
The option is liquid and can be unwound at any time.
i) Yellen has done a poor job of communicating the Fed's thinking but its
increasingly clear the Fed will brake later than usual
ii) Betting on higher us interest rates in the rates market isn't cost
effective because the forward curve is already pricing in higher rates
iii) The Dollar hasn't appreciated yet because short rates in the US haven't
risen meaningfully
iv) THE KEY POINT - FX volatility is very low in currency pairs like EURUSD
where central bank policy on each side is increasingly diverging. The low vol
makes this bet inexpensive to put on.
v) Because FX vol is so low betting now or soon with a one year time horizon
costs very little. id rather be early than late here
vi) i prefer ly expiry because this trade could take 6-12mths to play out
lY EURUSD VOL: Low - but then again most most vols are
What I like about EVRLISD is that central bank policy on each side is diverging
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This Table shows mid-market premiums (in % of notional) as spot and time
change.
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19.5 is mid (offer is 21)
4) Scale into £4mm Nationwide (UK Building Society) 6.875% perpetual which
yields 6.4% in GBP and is likely to be called in 5years
European Bank AT1 HyBrid Bonds (aka CoCo's) have rallied significantly. we
were unable to get the BBVA issue at the right levels.
A very similar bond which has rallied 30bp less than the BBVA is the
Nationwide (uK Building society) 6.875% perpetual which currently yields 6.4%
and is likely to be called in 5years time. It has a tierl capital trigger of
7% and current tierl capital ratio is 13% which is fair margin.
The Nationwide one I'm suggesting today is rated Fitch/S&P BB+, its parent is
Fitch/s&P rated single-A
The BBVA bond we tried to buy earlier is rated Fitch BB-, its parent is S&P
rated BBB-
I suggest scaling L2mm at 6.5% and £2mm at 6.75%. Transaction cost is 6bp from
mid.
Yield to call of Nationwide 6.875% perpetual ISIN XS1043181269
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Tazia for any execution, Q&A to me.
Best,
Nav
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Nam Gupta
Managing Director
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