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NAB Sells Euro Calls, Reportedly For Cheap Funding

National Australia Bank sold EUR1 billion (USD1.163 billion) of deep in-the-money euro calls/dollar puts last week, which led traders to speculate that it was to achieve cheap funding. The options, due to mature Dec. 2, had strikes at USD1.0490. The premium on the option was 10.8%, according to traders. Euro/dollar spot traded at USD1.169 on Wednesday. Majella Allen, spokeswoman in Melbourne, declined comment. Traders estimated that they only see trades like this once or twice a year.

"It's really a loan because it is so in the money," said one trader. A strategist said banks would normally sell forwards instead of options for contracts this far in the money. One of the major differences between an option and a forward is that the money is paid at maturity with forwards whereas it is paid at the start of an option contract.

Traders said they avoid executing these type of trades because the loan desks do not have adequate credit checking facilities. One said, "[John] Rusnak [a rogue trader at Allfirst who was jailed last year] gave these trades a bad name." But added, that there is no reason to think NAB is doing anything wrong. In fact, another trader speculated that the bank could just be unwinding an option it had sold to a client.

There is also mark-to-market risk for the option purchaser as an option is priced off implied volatility so any move in vol could drastically alter the value of the option. This would not be the case with a forward, noted the strategist.

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