Deutsche Bank last week closed out a trade designed to profit from short-term increases in the Mexican peso versus the U.S. dollar. In the original trade, which clients were advised to put on about 10 days ago, the client bought a European-style two-month at-the-money-forward dollar put struck at MXN9.96 and sold a European-style dollar put struck at the spot level, MXN9.75. This cost the client about 1.1% of the dollar notional, said Christian Stracke, v.p., Latin American local markets strategist for Deutsche Bank in New York. The trade makes money as the Mexican peso appreciates against the dollar.
Last Monday was a holiday in Mexico, meaning that the markets were not open. In the absence of news out of the country, players bought dollars the Friday before, as bad news coming out of the U.S. typically sends the peso down more than the dollar, and bad news coming out of the U.S. was a possibility, explained Stracke. This buying activity in the U.S. dollar about 10 days ago sent the dollar higher, to around MXN9.79 from around MXN9.63. But it was reasonable to expect that the dollar would fall against the peso as players last week sold the dollars they had bought the week before.
The bank recommended clients close out the trade last Thursday, when spot was at MXN9.65. This level is a technical resistance level, said Stracke. Net premium was 1.36% when the trade was closed out.
