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Similar to Chapter 7 fx trading strategies
Similar to Chapter 7 fx trading strategies (20)
Chapter 7 fx trading strategies
- 1. Managing Market Risk Under The Basel III Framework
Copyright © 2016 CapitaLogic Limited
Chapter 7
Foreign Exchange
Trading Strategies
Managing Market Risk Under The Basel III Framework
The Presentation Slides
Website : https://sites.google.com/site/quanrisk
E-mail : quanrisk@gmail.com
- 2. Copyright © 2016 CapitaLogic Limited 2
Declaration
Copyright © 2016 CapitaLogic Limited.
All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
Authored by Dr. LAM Yat-fai (林日林日林日林日辉辉辉辉),
Principal, Structured Products Analytics, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration (Finance),
CFA, CAIA, FRM, PRM.
- 3. Copyright © 2016 CapitaLogic Limited 3
Simple directional
trading strategies
UnfundedFundedDifference
ShortDown
LongUp
FX forward
Foreign
currency
- 4. Copyright © 2016 CapitaLogic Limited 4
Insurance strategies
LongDown
LongSteady
Butterfly
Upfront premium to be paid,
no downside risk
Insurance
LongUp
PutCall
- 8. Copyright © 2016 CapitaLogic Limited 8
Construction of butterfly
Put
Call
Long
Long
Short × 2
Short × 2
K2 =
(K1+K3) / 2
Long
Long
K3K1
- 9. Copyright © 2016 CapitaLogic Limited 9
Insurance premium strategies
ShortDown
ShortSteady
Straddle
/ Strangle
Upfront premium to be collected,
high downside risk
Insurance
premium
ShortUp
PutCall
- 12. Copyright © 2016 CapitaLogic Limited 12
Lower cost insurance strategies
Long putShort putBear spread
Short callLong callBull spread
K2K1
- 13. Copyright © 2016 CapitaLogic Limited 13
Bull spread
FX rate at maturity
Payoff
- 14. Copyright © 2016 CapitaLogic Limited 14
Bear spread
FX rate at maturity
Payoff
- 15. Copyright © 2016 CapitaLogic Limited 15
Low cost hedging strategies
Long
forward
K2
Short callShort putCollar
Long callShort put
Risk
reversal
K3K1
- 16. Copyright © 2016 CapitaLogic Limited 16
Risk reversal
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0
0.02
0.04
FX rate at maturity
Payoff
- 17. Copyright © 2016 CapitaLogic Limited 17
Risk reversal
Low cost
Long an OTM FX call option
Short an OTM FX put option
To protect the situations outside the risk
tolerance range of an investor
Zero Delta risk reversal
The most liquidly traded strategy in the FX
derivatives market
- 18. Copyright © 2016 CapitaLogic Limited 18
Collar
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0
0.02
0.04
FX rate at maturity
Payoff
- 19. Copyright © 2016 CapitaLogic Limited 19
Currency linked deposits
At origination
Customer makes a term deposit in HKD
At maturity
If HKD per CNY rate > strike rate
Customer receives HKD principal + high interest
If HKD per CNY rate < strike rate
Customer receives RMB principal + high interest
bought at strike rate
Worse performer of a simple HKD deposit and a
simple CNY deposit
- 20. Copyright © 2016 CapitaLogic Limited 20
Payoff of a CLD
[ ]
[ ]
[ ]
T
T
T
Payoff = Min S , K
= Min S - K, K - K + K
= K - Max K - S , 0
= Long position in a domestic curreny deposit
& short position in a put option
- 21. Copyright © 2016 CapitaLogic Limited 21
Currency linked deposits
-0.04
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0
0.02
0.04
FX rate at maturity
Payoff
