FX Option Solutions. FX Hedging & Investments

Transcription

1 FX Option Solutions FX Hedging & Investments

2 Contents 1. Liability side 2 Case Study I FX Hedging Case Study II FX Hedging 2. Asset side 30 FX Deposits 1

3 1. Liability side Case Study I FX Hedging

4 Long EUR/USD position For illustration purposes, the stgies presented in the first part of this book follow these assumptions: Customer has a Long position in EUR against USD Customer needs hedging for a tenor of three months Reference spot is at (spot) Reference outright forward is at () Stgy summary Upside participation Downside participation Premium Guaranteed Best case ne ne Put 100% ne Yes open Cylinder ne Participating 50% ne open Cylinder Extra ne Extra ne European Extra ne Inverse Extra ne Plus ne Extra Extra Knock-Out 100% if barrier hit ne open if Contingent ne Inverse Cylinder ne Seagull 100% ne open Bonus European Extra ne

5 Low risk, 100% Hedge, no upside participation A contract is a deal to exchange currencies at an agreed date in the future, at a pre-determined exchange set at inception. Entering into a is the most standard and basic stgy for the customer to fully hedge the position against currency risk With a Contract, customer agrees to sell its EUR at the Outright Rate of, which provides full protection against the depreciation of the spot, but will not be able to benefit should the spot EUR/USD appreciate s are determined on the basis of the spot, adjusted for the interest differential between the currencies Spot Opportunity loss Provides full protection against a depreciation of the EUR/USD Customer is unable to benefit from appreciation of the EUR/USD above Opportunity profit premium Spot at expiry 4

6 Put Option Low risk, 100% Hedge, full upside participation A plain vanilla Put Option on the EUR gives the customer the right, but not the obligation, to sell the EUR against USD at a fixed on expiration of the option A premium for the option is paid upfront and the option is exercised when the spot is below the fixed ( strike price ) at expiry For a premium of USD per EUR, customer has the right to sell the EUR at, while retaining the possibility of selling at more favourable s in case of EUR/USD appreciation The premium is determined by the following factors: current forward, strike price, tenor, volatility and interest s of the underlying currencies 1 Spot Outcome Option is exercised Sell EUR at market Put Option breakeven Provides full protection against a depreciation of the EUR/USD Compared to the, customer is able to sell EUR at a more favourable if the spot at expiry is above Premium required to be paid up front Due to the premium, customer realizes a less favourable than the if the spot at expiry is below Realized Rate accounts for the premium paid upfront 5

7 Cylinder Low risk, 100% Hedge, limited upside participation A Cylinder is a zero cost stgy and provides a minimum and a maximum realizable for the EUR against the USD. It provides full protection against the depreciation of the spot and involves the purchase of a Put option and the sale of a Call option for the same amount. The premium raised by the sale of the Call matches the cost of the purchased Put Option Customer buys a Put option on the EUR at a strike of and sells a Call option on the EUR at a strike of, thus being assured of a minimum and maximum selling price for the EUR against USD and Spot Cylinder Provides full protection against a depreciation of the EUR/USD Net zero premium stgy Compared to a, customer is able to sell the EUR at a higher if the spot at expiry is above Customer is unable to benefit from the appreciation of the EUR/USD above guaranteed which is lower than the

8 Participating Low risk, 100% Hedge, 50% upside participation A Participating is a zero-cost stgy and provides full protection against the depreciation of the spot while allowing the customer to partially benefit from an unlimited appreciation of the underlying spot It involves buying a Put option on the EUR for 100% of the hedge amount and selling a Call option on the EUR for 50% of the hedge amount, both at a strike of Therefore if the EUR/USD appreciates, customer may secure a better for the open part of the hedge amount (50%) by selling the EUR at the spot market By entering into a Participating, customer is guaranteed a minimum of and participates in EUR/USD appreciation above that level Participating Outcome Put option is exercised Spot Provides full protection against a depreciation of EUR/USD Net zero premium stgy Compared to a, customer is able to sell the EUR at a higher average if the spot at expiry is above % participation in unlimited appreciation of the spot Sell 50% at spot Sell 50% at guaranteed which is lower than the 7

9 Cylinder Extra Low risk, 100% Hedge, upside participation Similar to a Cylinder, the Cylinder Extra is a zero cost stgy and provides a minimum and maximum realizable for the EUR against USD. The difference in a Cylinder Extra is that customer can achieve a higher maximum realizable compared to the Cylinder, but customer also has a chance to end at a lower realizable compared to the Cylinder Customer is (a) guaranteed a minimum of , (b) may fully benefit from the appreciation of EUR/USD as long as the spot does not trade at or above , and (c) has a potential obligation to sell the EUR at if the EUR/USD spot appreciates to or above barrier level and and Spot Highest spot < Cylinder Extra Provides full protection against the depreciation of EUR/USD guaranteed which is lower than the Spot at expiry Net zero premium stgy Higher maximum possible compared to Cylinder Higher guaranteed compared to Cylinder Customer is unable to benefit from appreciation of the EUR/USD above

10 Extra Low risk, 100% Hedge, upside participation A Extra is a zero-cost stgy and provides full protection against the depreciation of the spot EUR/USD, while at the same time allowing the customer to benefit from the appreciation of the spot up to a pre-determined barrier level Customer is (a) guaranteed a minimum of , and (b) is able to benefit from EUR/USD appreciation up to If the EUR/USD spot trades at or above at any time during the tenor, customer will be required to sell the EUR at regardless of where the spot is at expiry barrier level Highest spot & Spot < & Extra Provides full protection against a depreciation of the EUR/USD Net zero premium stgy If the spot appreciates but does not trade at or above , customer may sell the EUR at a which is higher than the guaranteed which is lower than the If the spot trades at or above , customer is obliged to sell EUR at Barrier level is applicable at any time during the tenor

11 European Extra Low risk, 100% Hedge, limited upside participation A European Extra is a zero-cost stgy and provides full protection against the depreciation of the spot EUR/USD, while at the same time allowing the customer to benefit from the appreciation of the spot up to a predetermined barrier level Customer is (a) guaranteed a minimum of , and (b) benefits if EUR/USD appreciates up to at expiry If the EUR/USD spot trades at or above at expiry, customer will be required to sell the EUR at barrier level and Spot At or European Extra Provides full protection against a depreciation of EUR/USD Net zero premium stgy If the spot appreciates but does not trade at or above the barrier at expiry, customer may sell the EUR at a which is higher than the Barrier level is only applicable at expiry guaranteed which is lower than the If the spot at expiry trades at or above , customer is obliged to sell EUR at As compared to the Extra, the potential maximum is lower 10

12 Inverse Extra Low risk, 100% Hedge, limited downside participation An Inverse Extra is a zero-cost stgy and provides full protection against a depreciation of the spot EUR/USD, while at the same time allowing the customer to benefit from a depreciation of the spot down to a pre-determined barrier level Customer is (a) guaranteed a minimum of (= Inverse Extra Level), and (b) is able to benefit from EUR/USD depreciation down to , the barrier level Customer is able to benefit from EUR/USD depreciation down from to : Inverse Extra Level + (Inverse Extra Level- Final spot) barrier level and and Spot Lowest spot > Inverse Extra Provides full protection against a depreciation of EUR/USD Net zero premium stgy If the spot depreciates but does not trade at or below , customer will sell the EUR at a which is higher than the guaranteed which is lower than the If the spot trades at or below customer is obliged to sell EUR at Barrier level is applicable at anytime during the tenor

13 Plus Low risk, 100% Hedge, limited upside participation A Plus is a zero-cost stgy and provides full protection against a depreciation of the spot EUR/USD, while at the same time allowing the customer to benefit from the appreciation of the spot up to a pre-determined barrier level Customer is (a) guaranteed a minimum of and (b) able to benefit from EUR/USD appreciation up to If the EUR/USD spot trades at or above , at any time during the tenor, customer will be required to sell the EUR at, which is equal to the barrier level Spot Highest spot < and < and Plus barrier is hit Provides full protection against a depreciation of the EUR/USD Net zero premium stgy If the spot appreciates but does not trade at or above1.3675, customer may sell the EUR at a which is higher than the guaranteed which is lower than the If the spot trades at or above , customer is obliged to sell EUR at Barrier level is applicable at any time during the tenor

14 Extra Extra Low risk, 100% Hedge, limited downside and limited upside participation An Extra Extra is a zero-cost stgy and provides full protection against a depreciation of the EUR/USD, while at the same time allowing the customer to benefit from both the appreciation and depreciation of the spot, both to a predetermined barrier level Customer is (a) guaranteed a minimum of ( Extra Extra Level ), and (b) is able to benefit from: - EUR/USD appreciation: up to ; computed as follows: Extra Extra Level + (Final spot Extra Extra Level) - EUR/USD depreciation: down to ; computed as follows: Extra Extra Level + (Extra Extra Level - Final spot) Extra Extra barrier level Spot Lowest spot > Highest spot < Provides full protection against a depreciation of EUR/USD Net zero premium stgy If the spot appreciates but does not trade at or above , or if the spot depreciates but does not trade at or below , customer may sell the EUR at a which is higher than the guaranteed which is lower than the If the spot trades at or beyond both barrier levels customer will not be able to benefit and is obliged to sell EUR at Barrier levels and are applicable at any time during the tenor 13

15 Knock-Out Low risk, 100% Hedge, with possible full upside participation The Knock-Out is a zero cost stgy and provides full protection against a depreciation of the spot EUR/USD. At the same time the customer will be able to benefit from an appreciation of the spot if this spot hits a barrier level at any time during the tenor of the stgy Customer is guaranteed a minimum of , regardless of whether the spot does or does not hit the barrier level If the EUR/USD spot trades at any time during the tenor at or below (barrier level) customer will be able to fully benefit from EUR/USD appreciation up from Knock-Out barrier is hit barrier is not hit Spot at Expiry Spot Barrier hit Yes Provides full protection against a depreciation of the EUR/USD Net zero premium stgy If the spot does trade at or below and appreciates afterwards, customer may sell the EUR at a which is higher than the Barrier level is applicable at any time during the tenor guaranteed which is lower than the If the spot does not trade at or below , customer will not be able to benefit from a appreciation of the spot 14

16 Contingent Low risk, 100% Hedge, limited upside participation The Contingent is a zero cost stgy and provides full protection against a depreciation of the spot EUR/USD. At the same time the customer will be able to benefit from the appreciation of the spot up to a pre-determined level Customer is (a) guaranteed a minimum of and (b) is able to profit to benefit from EUR/USD appreciation up to If the EUR/USD spot trades at or above or at or below at any time during the tenor, customer will be required to sell the EUR at , regardless where the spot is at expiry Contingent barrier is not hit barrier is hit Spot at Expiry Spot Barrier(s) hit Yes Provides full protection against a depreciation of the EUR/USD Net zero premium stgy If the EUR/USD appreciates but does not trade at or above or at or below , customer may sell the EUR at a which is higher than the guaranteed which is lower than the If the spot trades at or beyond one of the barriers, customer is obliged to sell EUR at Barrier levels are applicable at any time during the tenor 15

17 Inverse Cylinder Low risk, 100% Hedge, limited downside participation An Inverse Cylinder is a zero cost stgy and provides a minimum and a maximum realizable for the EUR against the USD. It gives the opportunity to profit from a depreciation until a pre-determined level and provides protection to a further depreciation. It involves the purchase of an In-The-Money Put option and the sale of an In-The-Money Call option for the same amount. The premium raised by the sale of the Call matches the cost of the purchased Put Option. Customer buys a Put option on the EUR with a strike of and sells a Call option on the EUR with a strike of , thus being assured of a minimum and maximum selling price for the EUR against USD Inverse Cylinder and Spot Provides full protection against a depreciation of the EUR/USD Net zero premium stgy Compared to a, customer is able to sell the EUR at a higher if the spot at expiry is below Customer is only able to benefit from a depreciation in EUR/USD; the effective falls if EUR/USD appreciates guaranteed which is lower than the

18 Seagull Low risk, 100% Hedge, upside participation A Seagull is a zero-cost stgy and provides full protection against the depreciation of the EUR/USD exchange, while at the same time allowing the customer to benefit from an appreciation of the spot until and above a pre-determined level Customer buys a put option on the EUR at a strike of , sells a call option on the EUR at a strike of , and buys a call option on the EUR at a strike of Customer is (a) guaranteed a minimum of (Put level), (b) is able to benefit from EUR/USD appreciation until and (c) is able to benefit from EUR/USD appreciation above , with a realized computed as follows: Spot at expiry - ( ) & & Spot Seagull Provides full protection against a depreciation of the EUR/USD Net zero premium stgy Opportunity to benefit from an appreciation of EUR/USD until Opportunity to benefit from an appreciation of EUR/USD above guaranteed which is lower than the If the spot trades between and , the customer has to sell EUR at The realized if spot trades above will be lower than the market 17

19 Bonus European Extra Low risk, 100% Hedge, upside participation A Bonus European Extra is a zero-cost stgy appropriate for downside protection combined with a bearish view on EUR/USD The stgy provides full protection against depreciation of the EUR/USD exchange while at the same time allowing the customer to benefit from an appreciation of the until a pre-determined level In addition, if a barrier on the downside gets hit at any time during the tenor, the customer receives a bonus. The bonus level can be chosen freely and will impact the worst and best case. The lower the barrier, the higher the bonus (ceteris paribus) Customer is (a) guaranteed a minimum of , (b) is able to benefit from EUR/USD appreciation up to , and (c) will receive a bonus of USD if EUR/USD trades below at any moment during the full tenor Bonus European Extra Spot Lowest Spot Realized Rate n/a & & > Provides full protection against a depreciation of the EUR/USD Net zero premium stgy If spot appreciates but does not trade at or above at expiry, customer may sell the EUR at the market Customer receives bonus if EUR/USD hits during the tenor & & > > If EUR/USD does not hit during the tenor, customer is hedged at a guaranteed which is lower than the If spot at expiry trades at or above , customer is obliged to sell EUR at or , depending on the barrier being hit or not 18

20 1. Liability side Case Study II FX Hedging

21 Short EUR/USD position For illustration purposes, the stgies presented in the second part of this book follow these assumptions: Customer has a Short position in EUR against USD Customer needs hedging for a tenor of three months Reference spot is at (spot) Reference outright forward is at () Stgy summary Downside participation Upside participation Premium Best case Guaranteed ne ne Call 100% ne Yes open Cylinder ne Participating 50% ne open Cylinder Extra ne Extra ne European Extra ne Inverse Extra ne Plus ne Extra Extra Knock-Out 100% trigger hit ne open if Contingent ne Inverse Cylinder ne Seagull 100% ne Open Bonus European Extra ne

22 Low risk, 100% Hedge, no downside participation A Contract is a deal to exchange currencies at an agreed date in the future, at a pre-determined exchange set at inception. Entering into a is the most standard and basic stgy for the customer to fully hedge the position against currency risk With a Contract, customer agrees to buy its EUR at the Outright Rate of which provides full protection against the appreciation of the spot, but will not be able to benefit should the EUR/USD depreciate s are determined on the basis of the spot, adjusted for the interest differential between the currencies Spot Opportunity profit Provides full protection against an appreciation of the EUR/USD Customer is unable to benefit from depreciation of the EUR/USD below Opportunity loss premium 21

23 Call Option Low risk, 100% Hedge, full downside participation A plain vanilla Call Option on the EUR gives the customer the right, but not the obligation, to buy the EUR against USD at a fixed on expiration of the option A premium for the option is paid upfront and the option is exercised when the spot is above the fixed ( strike price ) at expiry For a premium of USD per EUR, customer has the right to buy the EUR at, while retaining the possibility of buying at more favourable s in case of EUR/USD depreciation This premium is determined by the following factors: current spot, strike price, tenor, volatility and interest s of the underlying currencies 1 Breakeven Spot Outcome Buy EUR at market Option is exercised Call Option Provides full protection against an appreciation of the EUR/USD Compared to the, customer is able to buy EUR at a more favourable if the spot at expiry is below Premium required to be paid up front Due to the premium, customer realizes a less favourable than the if the spot at expiry is above Realized Rate accounts for the premium paid upfront 22

24 Cylinder Low risk, 100% Hedge, limited downside participation A Cylinder is a zero cost stgy, and provides a maximum and a minimum realizable for the EUR against the USD. It provides full protection against the appreciation of the spot and involves the purchase of a Call and the sale of a Put for the same amount. The premium raised by the sale of the Put exactly matches the cost of a Call Option Customer buys a Call option on the EUR at a strike of and sells a Put option on the EUR at a strike of , thus being assured of a maximum and minimum buying price for the EUR against the USD and Spot Cylinder Provides full protection against an appreciation of the EUR/USD Net zero premium stgy Compared to a, customer is able to buy the EUR at a lower if the spot at expiry is below Customer is unable to benefit from the depreciation of the EUR/USD below guaranteed which is higher than the

25 Participating Low risk, 100% Hedge, 50% downside participation A Participating is a zero-cost stgy and provides full protection against the appreciation of the spot while allowing the customer to partially benefit from an unlimited depreciation of the underlying spot It involves buying a Call option on the EUR for 100% of the hedge amount and selling a Put option on the EUR for 50% of the hedge amount, both at the strike of Therefore if the EUR/USD depreciates, customer may secure a better for the open part of the hedge amount (50%) by buying the EUR at the spot market By entering into a Participating, customer is guaranteed a maximum of and participates in EUR/USD depreciation below that level Participating Outcome Buy 50% at spot Buy 50% at Spot Provides full protection against an appreciation of the EUR/USD Net zero premium stgy Compared to a, customer is able to buy the EUR at a lower average if the spot at expiry is below % participation in unlimited depreciation of the spot Call Option is exercised guaranteed which is higher than the 24

26 Cylinder Extra Low risk, 100% Hedge, limited downside participation Similar to a Cylinder, the Cylinder Extra is a zero cost stgy and provides a minimum and maximum realizable for the EUR against USD. The difference in a Cylinder Extra is that customer can achieve a lower minimum realizable compared to the cylinder, but customer also has a chance to end at a higher realizable compared to the Cylinder Customer is (a) guaranteed a maximum of (b) may fully benefit from the depreciation of EUR/USD as long as the spot does not trade at or below , and (c) has a potential obligation to buy the EUR at if the spot the EUR/USD depreciates to or below Lowest spot & Spot > & Cylinder Extra Provides full protection against an appreciation of the EUR/USD guaranteed which is higher than the barrier level Spot at expiry Net zero premium stgy Lower minimum possible compared to Cylinder Lower guaranteed compared to Cylinder Customer is unable to benefit from depreciation of the EUR/USD below

27 Extra Low risk, 100% Hedge, limited downside participation A Extra is a zero-cost stgy and provides full protection against the appreciation of the spot, while at the same time allowing the customer to benefit from the depreciation of the spot down to a predetermined barrier level Customer is (a) guaranteed a maximum of, and (b) is able to benefit from EUR/USD depreciation down to If the EUR/USD spot trades at or below at any time during the tenor, customer will be required to buy the EUR at regardless of where the spot is at expiry Extra Lowest spot & Spot & > barrier level Provides full protection against an appreciation of the EUR/USD Net zero premium stgy If the spot depreciates but does not trade at or below , Customer may buy the EUR at a which is lower than the guaranteed which is higher than the If the spot trades at or below , customer is obliged to buy EUR at Barrier level is applicable at any time during the tenor 26

28 European Extra Low risk, 100% Hedge, downside participation A European Extra is a zero-cost stgy and provides full protection against the appreciation of the spot EUR/USD, while at the same time allowing the customer to benefit from the depreciation of the spot down to a predetermined barrier level. Customer is (a) guaranteed a maximum of, and (b) benefits if EUR/USD depreciates down to at expiry If the EUR/USD spot trades at or below at expiry, customer is required to buy the EUR at At or below and Spot Extra Provides full protection against the appreciation of the EUR/USD guaranteed which is higher than the barrier level Net zero premium stgy If the spot depreciates but does not trade at or below at expiry, customer may buy the EUR at a which is lower than the If the spot at expiry trades at or below , customer is obliged to buy the EUR at As compared to the Extra, the potential minimum is higher Barrier level is only applicable at expiry 27

29 Inverse Extra Low risk, 100% Hedge, downside participation An Inverse Extra is a zero-cost stgy and provides full protection against the appreciation of the spot EUR/USD, while at the same time allowing the customer to benefit from an appreciation of the spot up to a predetermined level Customer is (a) guaranteed a maximum of ( Inverse Extra Level ), and (b) is able to benefit from EUR/USD appreciation up to , the barrier level Customer is able to benefit from EUR/USD appreciation up from to : Inverse Extra Level - (Final spot- Inverse Extra Level) Inverse Extra barrier level and and Spot Highest spot < Provides full protection against an appreciation of the EUR/USD Net zero premium stgy If the spot appreciates but does not trade at or above , customer may buy the EUR at a which is lower than the guaranteed which is higher than the If the spot trades at or above , customer is obliged to buy the EUR at Barrier level is applicable at any time during the tenor 28

30 Plus Low risk, 100% Hedge, limited downside participation A Plus is a zero-cost stgy and provides full protection against the appreciation of the spot EUR/USD, while at the same time allowing the customer to benefit from the depreciation of the spot, down to a pre-determined barrier level Customer is (a) guaranteed a maximum of and (b) able to benefit from EUR/USD depreciation down to If the EUR/USD spot trades at or below at any time during the tenor, customer will be required to buy the EUR at, which is equal to the Barrier is hit Spot and and Lowest spot > > Plus Provides full protection against an appreciation of the EUR/USD guaranteed which is higher than the barrier level Net zero premium stgy If the spot depreciates but does not trade at or below , customer may buy the EUR at a which is lower than the If the spot trades at or below , customer is obliged to buy the EUR at Barrier level , is applicable at any time during the tenor 29

31 Extra Extra Low risk, 100% Hedge, limited downside and limited upside participation An Extra Extra is a zero-cost stgy and provides full protection against the appreciation of the EUR/USD, while at the same time allowing the customer to benefit from both the appreciation and depreciation of the spot, both to a predetermined barrier level Customer is (a) guaranteed a maximum of ( Extra Extra Level ), and (b) is able to benefit from: - EUR/USD depreciation: down to ; computed as follows: Extra Extra Level (Extra Extra Level Final spot) - EUR/USD appreciation; up to ; computed as follows: Extra Extra Level (Final spot -Extra Extra Level) Extra Extra barrier level Spot Lowest spot > Highest spot < Provides full protection against an appreciation of the EUR/USD Net zero premium stgy If the spot depreciates but does not trade at or below , or if the spot appreciates but does not trade at or above , customer may buy the EUR at a which is lower than the guaranteed which is higher than the If the spot trades at or beyond both barrier levels customer will not be able to benefit and is obliged to buy the EUR at Barrier levels and are applicable at any time during the tenor 30

32 Knock-Out Low risk, 100% Hedge, with possible full downside participation The Knock-Out is a zero cost stgy and provides full protection against the appreciation of the spot EUR/USD. At the same time the customer will be able to benefit from a depreciation of the spot if this spot hits a barrier level at any time during the tenor of the stgy Customer is guaranteed a maximum of , regardless of whether the spot does or does not hit the barrier level. If the EUR/USD spot trades at any time during the tenor at or above (barrier level), customer will be able to fully benefit from EUR/USD depreciation down from barrier is not hit barrier is hit Knock-Out Spot Trigger level hit Yes Provides full protection against an appreciation of the EUR/USD Net zero premium stgy. If the spot does trade at or above and depreciates afterwards, customer may buy the EUR at a which is lower than the Barrier level is applicable at any time during the tenor guaranteed which is higher than the If the spot does not trade at or above , customer will not be able to benefit from a depreciation of the spot and will be obliged to buy the EUR at

33 Contingent Low risk, 100% Hedge, limited downside participation The Contingent is a zero cost stgy and provides full protection against the appreciation of the spot EUR/USD. At the same time the customer will be able to benefit from the depreciation of the spot down to a pre-determined level Customer is (a) guaranteed a maximum of and (b) able to benefit from EUR/USD depreciation down to If the EUR/USD spot trades at or below or at or above at any time during the tenor, customer will be required to buy the EUR at, regardless where there spot is at expiry barrier(s) is hit Contingent forward Spot Trigger(s) hit Yes barrier(s) is not hit Provides full protection against an appreciation of the EUR/USD Net zero premium stgy If the spot depreciates but does not trade at or below or at or above , customer may buy the EUR at a which is lower than the guaranteed which is higher than the

34 Inverse Cylinder Low risk, 100% Hedge, limited upside participation An Inverse Cylinder is a zero cost stgy and provides a maximum and a minimum realizable for the EUR against the USD. It gives the opportunity to profit from an appreciation until a pre-determined level and provides protection to a further appreciation. It involves the purchase of an In-The-Money Call option and the sale of an In-The-Money put option for the same amount. The premium raised by the sale of the Put matches the cost of the purchased Call Option. Customer buys a Call option on the EUR with a strike of and sells a Put option on the EUR with a strike of, thus being assured of a maximum and minimum buying price for the EUR against USD Inverse Cylinder and Spot Provides full protection against an appreciation of the EUR/USD Net zero premium stgy Compared to a, customer is able to buy the EUR at a lower if the spot at expiry is above Customer is only able to benefit from a appreciation in EUR/USD; the effective rises if EUR/USD depreciates guaranteed which is higher than the

35 Seagull Low risk, 100% Hedge, downside participation A Seagull is a zero-cost stgy and provides full protection against the appreciation of the EUR/USD exchange, while at the same time allowing the customer to benefit from a depreciation of the spot until and below a pre-determined level Customer buys a call option on the EUR at a strike of , sells a put option on the EUR at a strike of , and buys a put option on the EUR at a strike of Customer is (a) guaranteed a maximum of (Call level), (b) is able to benefit from EUR/USD depreciation until and (c) is able to benefit from EUR/USD depreciation below , with a realized computed as follows: Spot at expiry + ( ) & & Seagull Spot Provides full protection against an appreciation of the EUR/USD Net zero premium stgy Opportunity to benefit from a depreciation of EUR/USD until Opportunity to benefit from a depreciation of EUR/USD below guaranteed which is higher than the If the spot trades between and , the customer has to buy EUR at The realized if spot trades below will be higher than the market 34

36 Bonus European Extra Low risk, 100% Hedge, downside participation A Bonus European Extra is a zero-cost stgy appropriate for upside protection combined with a bullish view on EUR/USD The stgy provides full protection against appreciation of the EUR/USD exchange while at the same time allowing the customer to benefit from a depreciation of the until a pre-determined level In addition, if a barrier on the upside gets hit at any time during the tenor, the customer receives a bonus. The bonus level can be chosen freely and will impact the worst and best case. The higher the barrier, the higher the bonus (ceteris paribus) Customer is (a) guaranteed a maximum of, (b) is able to benefit from EUR/USD depreciation down to , and (c) will receive a bonus of USD if EUR/USD trades above at any moment during the full tenor Bonus European Extra Spot Highest Spot Realized Rate < & Provides full protection against an appreciation of the EUR/USD Net zero premium stgy If spot depreciates but does not trade at or below at expiry, customer may buy the EUR at the market Customer receives bonus if EUR/USD hits during the tenor & < & & < n/a If EUR/USD does not hit during the tenor, customer is hedged at a guaranteed which is higher than the If spot at expiry trades at or below , customer is obliged to buy EUR at or , depending on the barrier being hit or not 35

37 2. Asset side FX Deposits

38 FX Deposits For illustration purposes, the stgies presented in the third part of this book follow these assumptions Client has EUR available for deposit Client is willing to be exposed to the EUR/USD currency pair (GBP/USD for the FX Quanto Participation te) Tenor is for 3 months Regular deposit is 0.50% Reference spot is at for EUR/USD and for GBP/USD Product summary FX Range Deposit: possibility of yield pick up, low interest risk, no notional risk FX Range Accrual te: possibility of yield pick up, low interest risk, no notional risk Dual Currency Deposit: yield pick up, no interest risk, notional at risk FX Quanto Participation te: possiblity of yield pick up, interest risk, no notional risk 37

39 FX Range Deposit Yield pick up: 2.80%; Interest Rate risk: Low; tional risk:. An FX Range Deposit is a short term deposit with the possibility to receive a higher interest compared to the regular deposit. The high interest will be received if the spot of the underlying currency pair stays within the pre-determined range during the full tenor of the transaction. As a result of taking a view on the range of movements of a currency pair, customer is able to invest excess cash in a higher yielding asset. Interest (%) Mechanics Range: Observation period: High interest Low interest From moment of transaction to the moment of expiry 3.30%, if EUR/USD stays within the range 0.00%, if EUR/USD does not stay within the range Spot during observation period If spot remains within range, yield pick up from regular deposit is 2.80% At the deposit end date the notional amount will be available again Short term deposit (up to 12 months) Minimum interest is lower than the regular deposit Early redemption is not possible 38

40 FX Range Accrual te Yield pick up: 0.70%; Interest Rate risk: Low; tional risk:. An FX Range Accrual te is a short term note with the possibility to receive a higher interest compared to the regular deposit. The received interest is a function of the number of times that spot fixes within a predetermined range. For example: if 32 out of 64 fixings are within the range, the received interest will be 50% of the maximum interest possible. As a result of taking a view on the range of movements of a currency pair, customer is able to invest excess cash in a higher yielding asset. Interest (%) 1.20 (Max. Interest Rate) Mechanics Range: Observation period: Interest : Daily fixings from inception date until expiry Maximum Interest Rate * n/n n = number fixings inside range, N = total number of fixings Spot during observation period If spot fixes inside range every fixing day, the yield pick up from regular deposit is 0.70% At the note end date the notional amount will be available again Short term note (up to 12 months) Minimum interest is lower than the regular deposit Early redemption is not possible 39

41 FX Dual Currency Deposit Yield pick up: 4.00%; Interest risk: ne; tional risk: Yes. The FX Dual Currency Deposit ( DCD ) is a short term deposit which provides a higher interest than the regular deposit in exchange for the bank s right to repay the deposit notional amount in a second currency. Interest is always paid in the deposit currency An exchange for the currency pair (conversion ) is set at the contract inception Repayment of the deposit notional amount in the second currency will occur if the spot exchange at expiry is less attractive for the bank than the pre-determined conversion Mechanics Conversion : DCD : If at expiry: EUR/USD is at or below : EUR/USD is above : % in EUR Repayment will be in EUR Repayment will be in USD DCD (%) Yield pick up from regular deposit is 4% Deposit notional in EUR is not guaranteed 4 2 At the deposit end date the notional amount will be available again in either currency Exposure to FX risk Early redemption is not possible Short term deposit (up to 12 months) Conversion risk (%) 40

42 FX Quanto Participation te Yield pick up: depending on spot; Interest risk: Yes; tional risk:. An FX Quanto Participation te is a structured note linked to the performance of a foreign currency exchange. The level of participation in the positive performance of the underlying is determined at inception and redeemed in the Currency of Denomination, and depends on how much notional risk the investor accepts to take. The FX Quanto Participation te is enabling the investor to get exposure on a different currency pair than the currency of the underlying deposit without running an exchange risk on the achieved performance. Mechanics tional: EUR 1,000,000 Underlying Currency (U) : GBP/USD Strike (S): Participation (P): % of EUR notional 25.00% Capital Guarantee: Redemption (% of EUR tional): 99% 99% + P * Max((U /$ Expiry S /$)/S /$; 0%) Annualized Yield 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% % GBP/USD at maturity Possibility to enhance yield via exposure on a currency pair different than underlying At the deposit end date the guaranteed part of the notional will be returned in investment currency Short term deposit (up to 12 months) A lower interest than the current market might be realized. Early redemption is not possible 41

43 Disclaimer This presentation has been prepared on behalf of ING solely for the information of its clients. It is not investment advice or an offer or solicitation for the purchase or sale of any financial instrument. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, ING makes no representation that it is accu or complete. The information contained herein is subject to change without notice. ING and any of its officers, employees, related and discretionary accounts may, to the extent not disclosed above and to the extent permitted by law, have long or short positions or may otherwise be interested in any transactions or investments (including derivatives) referred to in this report. In addition, ING may provide banking, insurance or asset management services for, or solicit such business from, any company referred to in this report. Neither ING nor any of its officers or employees accepts any liability for any direct or consequential loss arising from any use of this report or its contents. Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved. Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange s. Past performance is not indicative of future results. Investors should make their own investigations and investment decisions without relying on this report. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this report. Additional information is available on request. 42