Investment Research
9 July 2013
Trade Recommendation Book profit on short EUR 6M5Y payer swaption and sell USD 3M5Y ATM+15bp payer swaption Net p/l at expiry 3M5Y, ATM+15bp
Book profit on sold payer 6M5Y EUR swaption.
Bp 25
Net p/l, initial prem= 81 ticks
20
The position was established on 25 June (link). The payer swaption was sold for a premium of 119 ticks and is now bought back for 57 ticks. Even though we believe it will expire out of the money, we decide to lock in more than ½ the received premium of a six-month option in just two weeks. At the same time, we enter a short payer swaption in the USD swap markets, where we believe risk-reward is now better.
15
10 5 -
-5
Spot ref, 1.67%
-15
ATM fwd, 1.84%
-20 Rate at expiry
-25 1.60%
New trade recommendation: Sell 3M5Y ATM +15bp USD3M payer swaption
b/e, 2.16%
-10
1.80%
2.00%
2.20%
Source: Danske Bank Markets
Spot ref:1.67%, 3M ATM forward: 1.84%, strike 1.99% Premium to be received 81 ticks
Norm vol. and underlying swap rate
Profit range at expiry if the 5Y USD swap rate is below 2.16%
Switch from EUR to USD due to better risk-reward The short position we established in EUR payers has performed as volatility and the underlying swap rate moved lower. The ECB forward guidance supported this move. While we still see value in holding on to the position fundamentally as we believe it will expire out of the money, we see much better risk-reward in closing it down and scaling in to short payer swaption in USD swaps. In the past two months there has been a significant repricing of the entire US swap curve. The markets were not prepared for this and volatility consequently spiked. Whereas a first rate hike (taking the Fed Funds to 0.50%) was priced in for Q1 2016 at the beginning of May, it is now priced in for the March 2015 FOMC meeting. Last week, when rates spiked the first hike was priced in for late 2014. The money market curve is broadly fair, in our view and we don’t expect it to have much steepening at current levels, since we do not believe the markets can buy into a story where the Fed hikes as early as in 2014. We therefore also believe there is limited upside to 5Y swap rates, hence the 3M forward curve is not likely to be realised. There is a 17bp roll-down in only three months on the underlying 5Y swap rate. Rather than receiving outright, where we would be more exposed if we are wrong in our directional view, we prefer selling payers out of the money to benefit from the spike in volatility – especially around the belly of the USD swap curve. The profit range is quite far from today’s spot reference making the risk-reward attractive, in our view.
Source: Danske Bank Markets
First Fed hike priced in by March ‘15 1.60%
1.40% 1.20%
1.00% 0.80%
0.60% 0.40% 0.25% 0.20%
0.00% Jun 13
Dec 13
Jun 14
Fed dates USD OIS 02/05/13
Dec 14
Dec 15
Source: Danske Bank Markets Note: USD OIS fwd rates between FOMC meetings
Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34
[email protected] Analyst Anders Vestergård Fischer +45 45 13 66 41
[email protected] Senior Analyst Peter Possing Andersen +45 45 13 70 19
[email protected]
Important disclosures and certifications are contained from page 3 of this report.
Jun 15
Fed funds target 24/06/13
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9 July 2013
Current strategies Instrument, currency and position Type 2 SWAP
Ccy EUR
1
USD
Vol
Scaling Trade ½ Rec 2y2y, Pay 15y15y ½
P/L
Risk Idea Long-end steepener
Sell 6m 10y straddle, ATM
Key levels for position
Not. EUR 13.4m/3.0m
Dv01 EUR 2.6k
Open date 09-Jul-13
USD 5.1m
EUR 0.2k*
28-Jun-13 510ticks
Elevated vol
Instrument
Entry 152bp
Now 148bp
Loss 97bp
Key dates
Type
Ccy
Scaling
Idea
Notional
10
Vol
EUR
½
Sell 6m 5y payer, ATM
Fade sell-off - elevated vol
EUR 16.8m
Dv01
-
Swap
EUR
½
Rec 2y 1y EUR
Adding to position
EUR 45.4m
EUR 4.5k
9 Swap
EUR
½
Rec 2y 1y EUR
Attractive roll-down
EUR 45.4m
EUR 4.5k
8 Swap
EUR
½
Pay 2/5/10 Fly, 6m fwd
Steeper EUR currve
EUR 34.5m/28m/7.5m
EUR6.9k
-
Profit 210bp
Horizon 3-6M
Bp -3.6bp
EUR, k -9.4
3-6M
-29.1ticks
-13.9
539ticks
Risk measures Trade
Add risk 118bp
Simple
P/L Simple
Key levels
Open date
Close date # Days
Entry lvl
Close lvl
Bp
25-Jun-13
09-Jul-13
14
119ticks
57ticks
62ticks
EUR, k 104
13-Jun-13
20-Jun-13
7
0.925%
1.210%
-28.5
-128
04-Jun-13
20-Jun-13
16
1.050%
1.210%
-16.0
-72
08-Mar-13
13-Jun-13
97
-23bp
-17bp
6.0
41.4 154
Swap
EUR
½
Pay 1y1y vs Rec 1y
Adding to position
EUR 121.9m/120.9m
EUR12.3k
02-May-13 30-May-13
28
6bp
18.5bp
12.5
7 Swap
EUR
½
Pay 1y1y vs Rec 1y
Steeper EONIA curve
EUR 121.9m/120.9m
EUR12.3k
10-Apr-13
30-May-13
50
10.25bp
17.8bp
7.6
93
6 Swap
EUR
½
Pay 5/15/30 Fly, 10Y tails
Long end steepener
EUR 4m/10.7m/8m
EUR3.4k
11-Jan-13
08-Mar-13
56
-15.5bp
-3.5bp
12.0
40.8
5 Swap
EUR
½
Pay 5y5y/10y10y spread
Long end steepener
EUR22.8m/14.1m
EUR10.1k
08-Feb-13
21-Feb-13
13
39.5bp
49bp
9.5
96
½
Buy Bund ASW
Risk-off hedge
EUR6.8k
07-Jan-13
28-Jan-13
21
19.4bp
25.4bp
6.0
40.8 -133
4
ASW DEU-EUR
3 Swap
EUR
½
Rec 3y1y
Attractive roll-down
2 Swap
EUR
½
Rec 3y1y, pay 2y1y
Carry with protection
-
Swap
USD
½
Pay 10y10y
1 Swap
USD
½
Pay 10y10y
EUR40.1m
EUR4.0k
10-Jan-13
28-Jan-13
18
1.195%
1.535%
-34.0
EUR67.2m/66.9m
EUR6.7k
07-Dec-12
17-Jan-13
41
44bp
33.5bp
10.5
70
Adding to position
USD5.1m
EUR2.7k
25-Sep-12
21-Feb-13
149
3.40%
3.95%
55.0
150
New Fed regime
USD5.1m
EUR2.7k
14-Sep-12
07-Jan-13
115
3.63%
3.745%
11.5
32
#
Rules of Engagement
1 A basis capital of EUR10m is assumed. Max drawdown on one position is 2% of capital, or EUR200k 2 We open either ½ position (max loss EUR100k), or full position (max loss EUR200k) in each strategy 3 Max potential drawdown for the sum of all positions open should be 6% of capital (EUR600k) 4 Volatility in the strategi is implicitly expressed in how wide the stop-loss/take-profit range is 5 Notional is derived from 1) the loss occured (Bp) if the stop reached and 2) the BPV -> nominal loss should not exceed 2% 6 How we measure performance. 1) batting average and 2) return on equity (ROE) 7 All trades are entered taking the bid/offer spread into account
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8 If no stop is assumed on a trade, DV01 is set to EUR20k on a full position 9 Vol trades with limited downside is opened as a full position. Un-limited downside is opened as ½ position. Initial DV01 is marked with (*)
Source: Danske Bank Markets
Trade Recommendation
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Current and closed strategies in 2013: performance of all trades in 2013 – batting average 67%, ROE 4.6%, see rules of engagements below
Trade Recommendation
Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of this research report are Lars Tranberg Rasmussen, Senior Analyst, Anders Vestergård Fischer, Analyst and Peter Possing Andersen, Senior Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank’s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication.
General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) (‘Relevant Financial Instruments’). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States.
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Trade Recommendation
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