HALISTER1: Generate Coupon Value Via 1-Year Dual Currency Note: Commerzbank

Generate Coupon Value Via 1-Year Dual Currency Note: Commerzbank

(Bloomberg) -- Selling short-expiry currency optionality derived from EUR/USD looks rewarding to enhance coupons of short-term structured notes, Commerzbank strategist Markus Koch writes in client note.
  • Recommends investors buy a dual currency note with a 1-year term, fixed coupon 2.83% p.a. if struck at 1.15 EUR/USD yet with the redemption currency contingent on next year’s fixing
  • Apart from generating a coupon of 2.83%, redemption will be made in the same currency as at issuance (EUR) unless the reference index EUR/USD is fixed above the strike at 1.15
  • Note that with only moderately lower strikes, coupons can be enhanced considerably
  • However, if the currency switch of the notional into USD is triggered, investors’ P&L would be adversely affected
  • While U.S. short rates may outpace the current forward path, the ECB is poised to ease its ultra-expansionary policy even further going into 2017
  • Once Yellen has unveiled her policy views at Jackson Hole, still lower USD rate implieds could be weighing on EUR gamma short-expiry swaptions
    • By contrast, volatility implied by EUR/USD options still trading at attractive levels
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Markus Koch (Commerzbank AG)

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