UBS Warburg is recommending customers buy euro/sterling double no-touch barrier options to take advantage of a stable or falling euro. Shahab Jalinoos, foreign exchange strategist in London, said consumer confidence data coming out of the U.S. over the last several weeks has started to show signs of growth in the third and fourth quarters. But he added capital flows between the two markets have switched to favor the euro-zone, which has caused the bank to shift its outlook toward a more stable euro.
In a sample transaction, an investor purchases an option with barriers set at USD0.5835 and USD0.6150, said Brian Lewis, director in foreign exchange distribution and financial engineering in London. The trade is designed to pay out eight times the 12.5% premium if euro/sterling spot does not touch either barrier during the two-month life of the option. Lewis said the trade can be put on for any size from USD100,000 to several million dollars. This transaction was priced last Thursday when spot was trading at USD0.6070.
Holders of the option can also profit if the euro falls against sterling in the spot market or if implied vol declines because the position is short delta and volatility, according to Lewis.
