Halister News

(Bloomberg) -- Current EUR swaption levels are attractive to set up hedges against a scenario of eventually higher rates in one or two years’ time, Societe Generale strategist Adam Kurpiel writes in client note.

• Buy cheap EUR 2y5y payers vs 1y1y5y mid-curve payers (same strike and notional)
• If in a year’s time, rates remain lower or equal to their current 1y forwards, the 1y1y5y payer expires OTM and the strategy becomes, a pure long 1y5y payer, at today’s 2y5y ATMF strike (0.37%)
• Longer term, if rates eventually increase, vols will follow higher
• At expiry of the 1y1y5y option, mark-to-market PnL is 2bp running if rates and vol remain at current levels and ~10bp running if forwards realize
• Risks: Until expiry of 1y1y5y, strategy is short gamma, but the mark-to-market risk is limited to the premium paid
  • Longer term, risk of unlimited losses if rates increase sharply in a year’s time and then decrease back below the 2y5y ATMF strike