Forex Investment and Currency Trading

Description

An FX Basket Note / Deposit is a principal protected structure that offers companies the opportunity to earn an enhanced yield based on the performance of a basket of currencies. An FX Basket Note / Deposit can pay a guaranteed minimum yield (typically zero), with an additional yield corresponding to the payout of a “basket option” – which depends on the net performance of a basket of currencies. Any yield is paid at maturity together with the repayment of principal.

Application

The company enjoys the diversification of the basket with the convenience of single structure. The components of the basket, direction of exposure and level of Minimum Yield can be customized to the needs of the company. The Additional Yield can be set at varying levels of “participation” in the basket performance.

The basket typically have one base currency (usually USD) against a basket of currencies – the most popular being calls on a basket of high yielding currencies.

For example, the company can gain exposure to 170% of the average appreciation of TWD, KWR, IDR, PHP and THB on a USD 10 million note over a six month period. the principal is protected and the Minimum Yield is 0.0%.

The main driver of value is the underlying FX spot and forward markets for each component, relative to its directional exposure in the basket.

The value of the option will increase (resulting in less favorable terms for the basket note) if the volatilities of the component currencies increase, or if the perceived correlations between the component currencies increase.

Variations

This structure can be offered in deposit or note format, depending on company needs and legal & compliance considerations.

Hedge Funds and other leveraged market participants may prefer to deal the outright basket option and pay an upfront premium, instead of committing the principal involved in a cash-backed deposit or note.