Forex Investment and Currency Trading

The recent financial storm and the liquidity injection by the Fed has proven to be USD negative as the market begins to digest the implications of the financial bail-out by the US government. At the same time, EUR/USD has rallied by more than 7% since the lows of 11th September, from 1.3882 to current levels of 1.4725. With the raised probability of a possible 25bp ECB rate cut in March 2009 from 30% to 40%, the following strategies below could help hedgers lock-in the USD weakness whilst still leaving potential for further EUR/USD appreciation.

1. EUR/USD Hedge 1
   Position: Long a EUR Put or a Ratio-ed
   Risk Reversal
   Expiry 3months
   Strike 1.4600 USD per EUR
   Is long a 1.4600 EUR Put in €10,000,000
   1.4950 USD per EUR
   Is short a 1.4950 EUR Call in
   (a) €7,500,000 if Barrier 1 is triggered
   (b) further €7,500,000 if Barrier 2 is triggered
   Barrier 1 1.5350 USD per EUR
   Barrier 2 1.5600 USD per EUR
   Upfront Premium Zero Cost
   Spot Reference 1.4715 USD per EUR
   3m Forward Reference 1.4695 USD per EUR
2. EUR/USD Hedge 2
   Position: is short a ratio-ed EUR/USD
   forward
   Expiry 3months
   Strike 1.4900 USD per EUR
   Is short a 1.4900 EUR/USD forward in
   €10,000,000 x €15,000,000. However, if the
   Barrier is ever traded, the Strike resets to 1.4600
   Reset Strike 1.4600 USD per EUR
   If EUR/USD spot ever trades at or below the 1.3800 barrier,
   the Strike is reset to 1.4600
   Barrier 1.3800 USD per EUR
   Upfront Premium Zero Cost
   Spot Reference 1.4715 USD per EUR
   3m Forward Reference 1.4695 USD per EUR