Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

S&P 500 Reverse Binary Straddle

VIEWS: 19 PAGES: 19

									 S&P 500 Reverse Binary Strangle
             (RBS)




Rok Ferjan, Biagio Guarneri, Alessandro Marra, Chiara Legnazzi, Mads S.Thomas
                                                                  New
                     Past        Market        The
Current portfolio
                    Markets    Expectation   Product
                                                        Risk      Asset     Summary
                                                               allocation




         Portfolio return 1Y and current composition:
                                                                                   New
                       Past           Market            The
Current portfolio
                      Markets       Expectation       Product
                                                                         Risk      Asset     Summary
                                                                                allocation



          What Happened?




           •   Commodities hit by slump in Asian production and demand
           •   FOHF outperformed Markets, but with a small loss
           •   Euro Bond yields are low, no longer «risk-free»
           •   Emerging Markets punished by Euro debt crisis
                                                                                     New
                       Past            Market             The
Current portfolio
                      Markets        Expectation        Product
                                                                           Risk      Asset     Summary
                                                                                  allocation




         •   European debt crises sparked fears of a double-dipped recession
         •   U.S market seen upon as «safe heaven» in equities
                                                                           New
                     Past       Market        The
Current portfolio
                    Markets   Expectation   Product
                                                         Risk              Asset     Summary
                                                                        allocation


         Volatility in key Markets




                                                                S&P        Euro     DAX
                                                                500        Stoxx 50
                                                      2011*     21,8%      28%       27%

                                                      2010*     19%        25%       20%

                                                      2009*     35%        33%       33%
                                                                                                                                             New
                          Past              Market              The
Current portfolio
                         Markets          Expectation         Product
                                                                                                      Risk                                   Asset                                     Summary
                                                                                                                                          allocation



          What are our Market Expectations?


                                                              Bull vs Bear ?
          • Long-term developement of the markets are dependent on Euro-zone politicians and the growth in
              U.S markets. i.e very challenging to predict         1600                                                                                                                  60
   8000                                                 50

   7000                                                 45         1400
                                                                                                                                                                                         50
                                                        40
   6000                                                            1200
                                                        35                                                                                                                               40
   5000                                                            1000
                                                        30
   4000                                                 25       DAX 800                                                                                                                 30
                                                                                                                                                                                              S&P 500
                                                        20       VDAX
                                                                    600                                                                                                                       VIX
   3000                                                                                                                                                                                  20
                                                        15
   2000                                                             400
                                                        10                                                                                                                               10
   1000                                                             200
                                                        5
      0                                                 0             0                                                                                                                  0
                                                                           11/2/…

                                                                                    1/2/2…
                                                                                             3/2/2…

                                                                                                      5/2/2…

                                                                                                               7/2/2…

                                                                                                                        9/2/2…

                                                                                                                                 11/2/…

                                                                                                                                          1/2/2…
                                                                                                                                                   3/2/2…

                                                                                                                                                            5/2/2…

                                                                                                                                                                     7/2/2…

                                                                                                                                                                              9/2/2…
     11/2/2009              11/2/2010


          •   Implied volatility is very high, i.e markets are buying protection - but less so in the U.S
          •   Taking a long term position in the markets now is not advisable - to much uncertainty
                                                                                    New
                        Past             Market              The
Current portfolio
                       Markets         Expectation         Product
                                                                       Risk         Asset      Summary
                                                                                 allocation


              Short Term outlook: U.S markets (S&P 500)


          •   U.S financials looks strong, high capital ratios (9%)
              and low exposure to sov. Debt (5 %-14 %)
          •   U.S banks are awashed with liquidity (QE) and have
              less funding problems
          •   «Safe haven» in relation to world markets               Conclusion short term:
                                                                      S&P 500 will fluctuate
                        BUT                                           around current market
                                                                      levels
          •   Correlation between U.S and European markets
              remain strong (78%)
          •   U.S equity are already trading at high historical
              levels (P/E of 19,4 – 16,4)
          •   Yields and dividends remain low and will continue
              to do some in the short term
                                                                          New
                       Past          Market         The
Current portfolio
                      Markets      Expectation    Product
                                                              Risk        Asset     Summary
                                                                       allocation


        S&P 500 RBS – Overall characteristics:



                    Issue amount                 2’000’000,00 EUR

                     Issue price                 100 %

                    EUR/USD FX0                  1.3518

                     Underlying                  S&P 500

             Underlying price at T0              1161.79

                     Trade Date                  November 23, 2011

                    Maturity Date                The third Friday of June 2012

                        Fees                     0.895 %
SPX BINARY      Call                 S&P 500 RBS – Unbundling :
Position        Long
Exercise Type   European       • 1’399’741,47 USD SPX Binary - Call
Strike          755.16
                               • 1’440’676,41 USD SPX Binary - Put
Cash            1’750’000,00
Payment         USD            • 161’040,00 USD    SPX – Put

SPX BINARY      Put            • 24’222,12 USD     Fees
Position        Long
Exercise Type   European
Strike          1568,42
Cash            1’750’000,00
Payment         USD

     SPX        Put
                                      2’703’600,00 USD
Position        Short
Exercise Type   European             ( 2’000’000,00 EUR )

Strike          700
Contracts       132
                                             Market                                                             New Asset
Current portfolio   Past Markets                                       The Product            Risk
                                           Expectations                                                         allocation




  +29.46%




    -35.27%




                                                                           S&P 500: 1161.79
     -100%
                                                567     699   755.16                                  1568.42




                                   Index: -51.20%     Index: -35%                                Index: +35%
                                                                    New
                     Past       Market        The
Current portfolio
                    Markets   Expectation   Product
                                                      Risk          Asset             Summary
                                                                 allocation

                                                             Probabilities & Statistics


                                                             S&P > 1568.42                 2.23 %

                                                             S&P < 755.16                  0.86 %
                                                             S&P in the range             96.91 %
                                                             Mean S&P level               1162.24
                                                             S&P < 699                    0.446 %


                                                              Expected Performance

                                                             Expected return              27.27 %
                                                             Expected volatility           12.8 %
                                                             Expected Sharpe                2.12
                                                             Ratio




                                                             (*) 15000 simulations has been run using
                                                             a GARCH (1,1) process.
                                 2 Risk Issues



             Market Risk                             Currency
              S&P 500                                Risk €/$


• Risk of S&P 500 increasing over its two        • Product is denominated in $,
  limits -35% and 35%.                             when consumption is in €.
• Upper part is partially ”hedged”               • No natural hedge in portfolio.
  through long position in equity
  (already held in the portfolio).
       Market Risk on S&P 500
                                                             Probabilities & Statistics


                                                      Return > + 35 %            0.628 %
                                                      Return < - 35 %               0.55 %
                                                      Return in the range       98.822 %
                                                      Mean Return                   4.98 %
                                                      Skew                     - 0.3024612
                                                      Excess of Kurtosis        0.7120707



                                                                     Back-Testing

                                                      Mean Return of the         28.67 %
                                                      Product
                                                      Volatility                    7.23 %

                                                      If there is a negative    - 37.24 %
                                                      Return what is its
                                                      mean ?
                                                      The worst Return          - 75.57 %


(*) Observations ranging from 1950 to November 2011
  Currency Risk

• Currencies are effected by macro- level factors like GDP growth,
  inflation etc. Here are the expected developement of these factors:


         FACTORS                       US                           EU
                                      AVG.                         AVG.
     GDP growth (Q3)                   2%                          1.4%

         Inflation                    3.11%                         3%

Unemployment rate (average)           9.03%                        10%
  Current-account deficit
                                     -1.33%                       -0.50%
            change
   Political and economic                              Unstable, uncertain future of
           stability            Stable, slow growth                 €
                    Forecasted development of EUR €/ USD $:

                   50%            80%
         Forecast Correct        Correct
   Date   Value     +/-            +/-
oct-2011 1,373    0,0000         0,0000
 nov-11   1,364   0,0140         0,0310
  dic-11  1,373   0,0180         0,0410
jan-2012 1,358    0,0210         0,0470
 feb-12   1,334   0,0230         0,0520
 mar-12   1,293   0,0250         0,0570
 apr-12   1,237   0,0270         0,0610
may-2012 1,254    0,0290         0,0640
jun-2012 1,273    0,0300         0,0680

   • The USD is expected to appreciate against the EUR in the short term due to the
     difference in growth between Euro and Dollar Area, the current recession,...
   • This will have a positive effect on the S&P 500 RBS
                         Both options end in the Both options end in the Assuming one option (the
           Scenario         money                money, but Forward       long binary put) is OOM
           Analysis      Forward exchange        Exchange rate=1.40 (USD and Forward Exchange
                            rate= 1.273          depreciates against EUR) rate=1.273
                         €                       €                         €
Initial capital          2,000,000.00            2,000,000.00             2,000,000.00
EUR/USD FX0                               1.3518                  1.3518                   1.3518
                          $                        $                        $
Initial investment in USD 2,703,600.00             2,703,600.00            2,703,600.00
Payoff long binary put    $                        $                        $
(K=1568,42)               1,750,000.00             1,750,000.00            -
Payoff long binary call   $                        $                        $
(K=755,16)                1,750,000.00             1,750,000.00            1,750,000.00
                          $                        $                        $
Total payoff in USD       3,500,000.00             3,500,000.00            1,750,000.00
                          €                        €                        €
Total payoff in EUR       2'749'410.84             2'500'000.00            1'374'705.42

Total return                             37.47 %                   25 %                   -31.26 %
  Proposed Portfolio Structure
        Proposed portfolio structure              Emerging market
                                                     Equities
Funds of Hedge                                         10%                  Commodities
    funds                                                                  (based on GSCI
      5%                                                                       Index)
                                 Developed
                               market equityies                                 10%
                                    25%
                                                                     Structured
                                                                    product 10%




Bonds in Euro
    15%
                         Real Estate                     Liquidity
                            10%                            15%
Why do we propose selling 10% of Developed market equity?


•   Assuming MSCI EFA ETF fund being representative of our developed equity
    market position
•   -8% yearly return (2011)
•   3 year average Sharpe ratio 0.52

•   Reduce portfolio exposure to market downturn
•   Intact optimal portfolio structure
•   Short maturity of the product
•   Replace the outstanding position with bigger Sharpe ratio


    RBS Sharpe ratio                             2.12
SUMMARY: Motivation for purchasing the S&P 500 RBS


• Current uncertainty in the Euro-zone favours investments in the U.S

• The S&P 500 is considered to be the most robust underlying in equity-markets

• Current interest rates levels are in favour of yield- enhancement products

• Options are excellent speculative veichles in times of high volatility

• Probability of loss is very low

• Return of investment substantially compensates the risks

• Overall: the S&P 500 RBS have a strong risk/return tradeoff which takes
  advantage of the short- term uncertainty in the market, giving the investor
  flexibility to adjust the portfolio in the long term.

								
To top