Learning Curve

Investors are always on the hunt for convex payoffs, wanting optionality for little or no cost. Payoffs with greater convexity, however, typically have greater cost. Convex payoffs exist in many markets and many asset classes. The bond market provides the classic example.

With suppressed volatility markets and suppressed bond yields, investors are chasing other ways to find yield. As a result of this, the fx market has seen a significant uptick in structured products, more specifically, dual currency deposits.

As the world bears witness to the second wave of fear in Europe, and a flight-to-quality to financial assets perceived to be safe such as German and U.S. government bonds, the possibility of Greece leaving the Eurozone and other European periphery countries like Italy and Spain following, has certainly become less politically incorrect.

On June 29, the U.S. Commodity Futures Trading Commission published a proposed policy statement and interpretive guidance addressing the extraterritorial reach of the swaps provisions of the Commodity Exchange Act that were enacted by Title VII of the Dodd-Frank Act.

On June 29, the U.S. Commodity Futures Trading Commission published a proposed policy statement and interpretive guidance addressing the extraterritorial reach of the swaps provisions of the Commodity Exchange Act that were enacted by Title VII of the Dodd-Frank Act.

The market for over-the-counter derivatives is transforming from a market of mostly bilateral contracts to a market where many contracts are executed through a central counterparty.

Ten years ago, the execution of a listed option order might have gone something like this: Client: “I’d like to buy 1,000 MSFT January 2003 30 strike calls, delta neutral.” The dealer would then call each of the four exchanges at the time (AMEX, CBOE, PCX, and the PHLX) and ask the market maker on each floor to quote the market. Five minutes later, the dealer would call each exchange back, scribble down each market (most them would make the bid/ask spread about a dime wide), sum up the number of options at each quoted price, and then transact on the exchanges that gave the “best” price until 1,000 options had been purchased for the customer.

The International Swaps and Derivatives Association Master Agreement serves as the basis for the vast majority of over-the-counter derivatives transactions. Two fundamental principles of the ISDA Master Agreement are: (1) upon the default of one party to a swap, the non-defaulting counterparty may terminate the swap, calculate its loss and claim damages; and (2) the obligation of each party to a swap to make payments to the other is subject to the satisfaction of the conditions precedent that no default has occurred with respect to the other party.

The International Swaps and Derivatives Association Master Agreement serves as the basis for the vast majority of over-the-counter derivatives transactions.

The Foreign Account Tax Compliance Act, which was signed into U.S. law on March 18, 2010, as part of the Hiring Incentives to Restore Employment Act, includes a number of revenue raising provisions affecting cross-border derivatives transactions.

The People’s Bank of China’s moves in the week of April 14 to broaden the intra-day onshore yuan trading band and lift the short U.S. dollar ban onshore are clearly big steps towards further fx liberalisation. With nearly seven-years of history history, our regression study in this Learning Curve shows that there have been four major structural breaks in the PBoC’s CNY basket since the floating of CNY in July 2005. The latest break at the start of this year shows a further decrease of USD weight in favor of Asian currencies, which was compensated by a flattening of the appreciation trend. USD/CNY volatility will continue to increase as CNY trades more in line with Asian currencies.

The European Securities and Markets Authority published a consultation paper Jan. 31 setting out its proposed guidelines on UCITS exchange-traded funds and other UCITS-related issues.