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Derivatives

Commerzbank Sees Profit In Weak U.S. Performance

Commerzbank Securities is touting several foreign exchange option strategies to take advantage of its expectation that the strength in the U.S. dollar is a temporary blip, sparked by military successes in Afghanistan. Fundamental weakness in the U.S. economy will see a reversion to a lower greenback against the euro, the bank believes.

To take advantage of the expected moves, Commerzbank is recommending clients buy one-year euro knock-in calls against the dollar. The options knock-in at USD0.86 and are struck at USD0.95, according to Jonathan Prole, global head of foreign exchange options in London. For corporate clients who need to buy euros the firm is touting one-year knock-out euro calls, with the knock-out at USD0.855 and a strike of USD0.95. Spot was USD0.88 last Tuesday when the recommendation was made. Strategists at rival firms said this is a logical trade because low volatility has made options with out-of-the-money strikes less expensive. Prole said the premium on these two strategies was 100 basis points. One-month euro/dollar implied vol was 10.4% Tuesday compared to 11.2% a month earlier.

Prole said Commzerbank's knock-out trade would be appropriate for clients, such as a German exporter who has dollars and needs to buy euros. This trade provides a hedge because if the euro appreciates against the dollar the exporter wins on the hedge despite taking a hit on its export position. The firm is recommending notional sizes for the trade of around EUR100 million (USD88 million).

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