Derivatives Week
--Rob McGlinchey
Strategists at Société Générale are recommending a risk reversal trade to take advantage of their view that the Australian dollar could strengthen against the U.S. dollar in the next six months, but decline again over the long term.
With spot at USD0.906, SocGen recommends investors buy a six-month European call option on the pair, with an out-of-the-money strike of USD0.92. To fund the call, the firm recommends investors sell a reverse knock-out put with an out-of-the-money barrier of USD0.73.
The move to sell a reverse knock-out put instead of a vanilla put would mitigate any losses from spot, falling but only as far as USD0.73. The seller has two opportunities to profit from the put: if spot rises or if it remains above the barrier at expiry.
"If you are bullish on the pair then the [reverse knock out] is the way to go...with a barrier you decrease the risk while also participating in a good outlook in the Australian dollar," Olivier Korber, fx options strategist in Paris, told Derivatives Week. He added that the pair should reach parity by June and peak at USD1.02 in September.
Sebastien Galy, currency strategist at BNP Paribas in New York, disagreed with the view on the pair, although he noted that the structure of the trade would limit losses.