Zero-Cost Conditional Swaption Favored If U.K. Remains in EU: SG
(Bloomberg) -- Finance GBP 5Y tail payer spreads by selling EUR mid-curve payers, Societe Generale strategist Adam Kurpiel writes in client note.
- Buy GBP 3m5y payer spread ATMF+5bp/ATMF+35bp, sell EUR 3m3y2y mid-curve payer ATMF, FX- and PV01-weighted
- Maximum profit of 30bp in 3 mo. if the GBP 5Y rate increases by 35bp above its 3m5y forward
- Once a payer spread is sufficiently in the money, it becomes vega-negative and theta-positive
- Potential for GBP rates to increase in case of the U.K. voting to remain within the EU is limited because of persisting uncertainty over U.K. growth and limited scope for monetary tightening
- Global grab for yield could also disproportionately benefit gilts, after significant outflows YTD
- At the same time, downside risks to the medium-term inflation outlook will keep the ECB prudent, anchoring the EUR belly
- Risks: Spike in EUR rates, exposed to unlimited losses at expiry if the EUR 3y2y rate moves up by more than 35.5bp
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Adam Kurpiel (Societe Generale SA)
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