Eric Ming Financial Markets Standard Chartered Bank (China) Limited May 2009

Transcription

1 Hedging in China Eric Ming Financial Markets Standard Chartered Bank (China) Limited May 2009

2 Content Standard d Chartered Bank Introduction ti FX Market Analysis USD/CNY Historical Trend USD/CNY Forecast USD/CNY Hedging Tools Major Currency against USD USD Interest est Rate Right time to hedge? CNY Interest Rate - Introduction CNY Yield Enhancement Product 2

3 Standard Chartered Bank Dalian Beijing Tianjin Qingdao Nanjing Suzhou Shanghai Ningbo Nanchang Hangzhou Chengdu Chongqing SCB (China) Branches: 15 Rep Offices: 1 Sub-branches: 37 Village Bank: 1 Guangzhou Xiamen Zhuhai Shenzhen 3

4 Standard Chartered Bank s Opened 1 st branch in Shanghai Pioneered the re-opening of branches & representative offices Established China Headquarters in Shanghai Obtained the license for Foreign Currency Derivatives 2005 Obtained the license for CNY Fixed Income Trading Obtained the license for CNY FX Forward 2006 Obtained the license for CNY FX Swap Shanghai Branch 1911 Launched RMB consumer banking services to PRC citizens 2007 One of the first 4 foreign banks become locally incorporated First foreign bank who gets license for onshore Commodity Derivatives 2008 Obtained the license for Equity Derivatives Beijing Branch 1923 Obtained premium dealership for PBOC paper and underwriting license of China Government Bond 4

5 Financial Markets China Achievements China Foreign Exchange Trade System (CFETS) Excellent Trading Bank Awards Excellent Member 2007 in the interbank RMB market Excellent Member 2008 on the interbank FX market Outstanding Dealer Awards China Foreign Exchange Trade System/National Interbank Funding Center Excellent Member 2005 in the interbank RMB market 2007 China Foreign Exchange Trade System/National Interbank Funding Center Excllent Member 2005 in the interbank FX market Our fixed income trader is awarded as the Outstanding Dealer Our FX traders are awarded as the Outstanding Dealer from on the FX interbank market for consecutive 4 years 5

6 SCB Financial Market Capability Financial Markets Asset Management Exposure Management Currency Linked Deposit Rate Linked Deposit Currency Interest Rate PCD (only FCY notional) PPCD No Touch, Touch, Wedding Cake, Range Accrual, etc Commodity Linked Deposit & Equity Linked Deposit CNY Extendible Deposit Spot, Forward, CCS (both FX&CNY) Option Strategy: Range Forward, Knockout Forward, Bonus Forward, etc. Option Strips: Participating Strip, Knock Out Forward Strip, At- Expiry Knock Out Strip, etc. Plain IRS, FRA,CNY Fixed Rate Loan Cap, Collar, Swaption, Inarrear Swap, Quanto, etc LIBOR Spread, Inverse Floater, Capped Floater, Multi- Callable, etc. Commodity Hedging 6

7 FX Market Analysis 7

8 USD/CNY Historical Graph PBoC start to float the spot Accelerating CNY appreciation, 1 Y NDF implied 16% annual appreciation Where is the next? 8

9 USD/CNY Recent 1 Year Movement 9

10 USD/CNY Forecast 10

13 USD/CNY onshore Hedging Tool Vanilla Forward Par Forward Structured Forward 13

14 CNY Vanilla Forward Forward contract characteristics: an obligation to buy or sell a currency in the future principle amount,exchange rate and settlement day will fixed on the trade day How to calculate Forward? Forward = Spot + Swap points Client sell USD against CNY eg e.g 18 May 2009 USD/CNY Spot month Swap Point month Forward * For tenor between 1-3 months, notional under USD 50 mio will not affect the market liquidity 14

15 CNY Vanilla Forward Advantages: FX rate fixed on the trade day, disregard of the volatility of the FX markets Zero cost Easy to understand and execute Tenor can be adjusted (extended or early settled) based on real cash flow of the client Risks: On settlement day,if the Forward rate is worse than the Spot rate,forward contract may not in the money 15

16 SCB Forward Procedure Pre-deal preparation: Set up Limits Open the accounts Sign dealing mandate supported by Board of Resolution and FX terms and Conditions If the tenor is less than 1 year, no need to sign further; if the tenor is longer than 1 year, need to sign ISDA Trade Day: Over the phone,quote the FX forward rate with SCB Settlement: Deliver the required supporting documents to SCB which is as the same as spot transaction requires Make sure account balance is sufficient to cater for the settlement of the forward contract Deliver the instruction to SCB,in turn SCB will effect the payment upon the instruction The final settlement can be adjusted (early take up or extend) according to the real cash flow schedule. 16

17 Forward Policy Environment Business All FX deals which h can be done through h FX spot exchange are also permitted to Scope be traded through FX forward exchange; According to the updated regulation, the supporting document for the hedging is only required to be submitted to the bank on the settlement date. Documents Required by SAFE Trade Day: no supporting document is needed. Settlement Day: The requirement is as the same as documents for FX Spot For USD 1 mio and above 1. IC card 2. Contract and Invoice (original or copy plus company seal) 3. TT, i.e. Instruction, fax is acceptable if sign i-6 17

18 USD Index USD continuously depreciate starting from year 2000, until the financial crisis in 2008 From long term perspective, USD has the depreciation pressure One of the most Important factor to influence the index:risk appetite 18

19 Major Currency GBP/USD EUR/USD USD/CHF USD/XAU 19

20 USD Interest Rate Hedging 20

21 Interest Rate Swap - Sample Floating rate Bank Client Fixed rate t 21

22 USD Interest Rate Outlook Fed Funds Target rate was cut from 1% to currently 0.25%, as far as the rate cuts are concerned, the game is over. However, Fed pledged to keep the low rate for an extended period of time Quantitative easing strategies are made official and will become the main focus for the H As part of quantitative measures, Fed is ready and willing to buy vast amount of treasury supply, which signals that the yields will stay very low for much of 2009 In addition to the monetary easing, progress has been made in improving liquidity, as indicated by the gradual easing of LIBOR in the recent weeks USD 1Month & 3Month & 6Month LIBOR USD 1M LIBOR USD 3M LIBOR USD 6M LIBOR Source: Bloomberg Jan-00 Oct-00 Aug-01 Jun-02 Apr-03 Feb-04 Dec-04 Oct-05 Jul-06 May-07 Mar-08 Jan-09 22

23 USD Interest Rate - right time to hedge? 10 years Government Bonds Yield vs. Swap rate White line is USD 10 years swap rate Orange line is USD 10 years Bond yield 23

24 USD liability Right time to hedge 3M LIBOR and v.s. 2 years Swap rate 2 years Swap rate is at historical low close to 3M LIBOR 24

25 USD Vanilla Swap - Liability Indicative Terms & Conditions Trade Rationale Currency Start Maturity Client pays Client receives USD Spot 2 Year 1.33%, p.a, qtly, A/360 3m LIBOR, p.a, qtly, A/360 3m LIBOR 0.785% Risks: USD rates are at historical low, with the fact that there is limited magnitude of rates to be cut further, it is a very good timing for the client to pay fixed rate to hedge its liabilities Client will lock in the 2 years rate at 1.33% client will have a negative carry of 54.5bps (from today s Libor fixing of 0.785%) Note: Indicative pricing as of 15 May

26 USD Cancellable Swap - Liability Indicative Terms & Conditions Currency Start Maturity Client pays Client receives Early Termination USD Spot 2 Year USD 2y Swap Rate 1.33% 3m LIBOR 0.785% 1.25%, p.a, qtly, A/360 3m LIBOR, p.a, qtly, A/360 SCB has the right to cancel the deal at the end of year 1 at no cost. Note: Indicative pricing as of 13 Feb 2009 Trade Rationale USD rates are at historical low, with the fact that there is limited magnitude of rates to be cut further, it is a very good timing for the client to pay fixed rate to hedge its liabilities Client will enjoy a low fixed cost for the first 12 months, with cost further lowering by 8bps (from 2y vanilla IRS ref 1.33%) If after 1 Year the structure is not called, client is locked into the fixed rate, which protects the client against rising interest rates Risks: If it s called by SCB after 1 Year, client will be left with an unhedged position client will have a negative carry of 46.5bps (from today s Libor fixing of 0.785%) Scenario Analysis 1) Non Call until maturity 2) Call after 12 months 26

27 CNY Interest Rate hedging 27

28 CNY Interest Rate Swap SCB has both Onshore and Offshore franchise Onshore IRS market started t in 2006, and SCB China was one of the four market makers. In Q1 2009, SCB China s trading volume is 170bn RMB while the whole market is 800bn RMB In offshore IRS market, SCB is one of the top 5 banks CNY IRS is actively traded between inter-bank members 28

29 Index Graphs 29

30 Market Reference Index 7 day repo: It is the short term interbank funding rate. Banks which borrow money put securities (normally government bonds) into banks which lend money as collaterals. 7 day repo rate is one of the most important market interest rates in china, which effectively reflects market liquidity and cost of funding. Shibor 3M: Most people may be more familiar 3M Libor, 3M Hibor, etc. PBoC is keen to develop Shibor Rates to be the benchmark rates, and it is also viewed as a steppingstone to accomplish the marketization of interest rate market. Shibor OIS (overnight index swap) : Like 7 day repo, o/n rate is one day interbank funding cost, but it is without collaterals. 1Y Depo: 1 Year PBoC deposit rate 30

31 CNY Interest Rate Swap SCB is one of the 63 China onshore IRS trading banks Index Four indexes onshore total trading volume since 1 Jan 2008 is over CNY 417 Bn; the most liquid one is the 7day repo IRS CNY Bn 7 day repo IRS 309 3M Shibor IRS 56 Shibor OIS 35 1Y Depo IRS 17 Total

32 CNY Interest Rate Swap - Sample A vanilla CNY Depo IRS SCB receive fixed 2.50% from client for 5 years with Notional: CNY 100,000,000.00; ; Trade Day: 01 Feb 2009 Fixed Leg Client Pays Notional: CNY 100 mio Tenor: 5 years, annual fixing, Act/365 Fixed rate 2.50% Floating Leg Client receives Notional: CNY 100 mio Tenor: 5 years, annual fixing, Act/365 Floating rate: PBoC 1y Deposit rate (current 2.25%) 32

33 CNY Interest Rate Swap - Sample Liability side hedging i.e. corporate clients 1Y PBoC Depo Bank Client Fixed rate 2.50% 1Y PBoC Lending Loan Bank Client Total Payoff = 2.5% + ( 1Y PBoC Lending 1Y PBoC Depo ) Given most times PBoC will do symmetry rates hike or cut for Lending and Depo, the spread between them is very stable. This means Client almost locked up its funding cost. 33

34 CNY liability Cost Reduction -CNY Quanto Products Underlying currency of the swap : CNY In the swap formula, the reference index used is in another currency e.g. USD LIBOR, HKD 5Y CMS etc Settlement currency is still in CNY 34

35 CNY Structured Deposit 35

36 PBoC rate CNY Structured Deposit Tenor Interest (p.a.) Current 0.36% 1 Day Call 0.81% 7 Day Call 1.35% Agreed 1.17% 3 Months 1.71% 6 Months 1.98% 1 Year 2.25% 25% 36

37 Looking for Higher Return Time Deposit Interest Principal VS. Enhanced Interest Principal CNY Time Deposit CNY Structured Deposit Return from structured deposit > = < Time deposit interest 37

38 3 months LIBOR Historical Graph 3 months LIBOR 38

39 LIBOR Daily Range Accrual: Indicative Price Based on 13 May 2009 market condition: Notional Amount: CNY20 million Tenor: 180 days Reference Index: 3 months LIBOR Reference Index: [0, 7%] Annual Interest: 1.70%+0.4% * n/n (p.a.) n= The actual number of days while reference index is within the Reference Range N = The actual number of days in respective calculation period Reference 6 months CNY time deposit rate : 1.98% p.a. Prevailing 3m Libor : 0.88 % (as of 13 May 2009) 39

40 LIBOR Daily Range Accrual: Indicative Price Based on 13 May 2009 market condition: Notional Amount: CNY20 million Tenor: 365 days Reference Index: 3 months LIBOR Reference Index: [0, 8%] Annual Interest: 2.25%+0.05% * n/n (p.a.) n= The actual number of days while reference index is within the Reference Range N = The actual number of days in respective calculation period Reference 12 months CNY time deposit rate: 2.25% 25% p.a. Prevailing 3m Libor : 0.88 % (as of 13 May 2009) 40

41 CNY Structured Deposit Summary Indicative Price CNY Structured Deposit Linked to 3 month LIBOR Range 1 Week 2-3 Weeks 1 month 3 months 6 months 12 months Tenor 7 Days 14/21 Days 30 Days 90 Days 180 Days 365 Days Interest 1.70% 1.80% 1.90% 2.00% 2.10% 2.30% 41

42 Extendible Structured Deposit Yield Enhancement - Offer investors the opportunity to enjoy an enhanced yield in initial interest period as compared with traditional CNY term deposit; Protection against Rates Cut - Offer investors the one-time option, not obligation, to extend the deposits at guaranteed interests rate in predetermined d extendible interest t period to protect t against potential PBOC rates cut; Tenor Flexible - from 1 month and as long as total of initial and extendible interest periods within 6 months No FX exposure - Denomination of principal and interest payments both remain in CNY 42

43 Extendible Structured Deposit Principal: Tenor: If to Extend, CNY50,000,000 Initial Interest Period: 1 month Extendible Interest Period: 1 month Principal: i CNY50,000, Interests: CNY50,000,000*1.35%*30/365 At maturity of 1 month Principal: CNY50,000,000 Interests: CNY50,000, *1.90% 90%*30/365 Decide to extend or not 5 business days before the maturity If NOT to Extend, Simply enter another deposit with higher yield Interest Rate: Initial Interest Rate: 1.90% p.a. Extendible Interest Rate: 1.35% p.a. 43

44 Indicative Pricing Tenor Initial Interest Rate Extendible Interest Rate 1+1 month 1.90% 1.35% 2+2 months 1.95% 1.35% 3+3 months 2.00% 1.71% Above pricing is indicative only subject to market movement. If the extendible structured deposits can not be held till maturity, break funding cost will be charged subject to market conditions. 44

45 Disclaimer This document is issued by Standard Chartered Bank (SCB) and contains indicative terms of prospective transactions. It is for discussion purposes only and does not constitute any offer, recommendation, or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. The indicate terms are neither complete nor final and are subject to further discussion and negotiation. The terms of any transaction entered into will be recorded in a written confirmation or other document. SCB has no fiduciary duty towards you, and assumes no responsibility to advise on and makes no representation as to the appropriateness or possible consequences of the prospective transaction. SCB and.or a connected company, may have a position in any of the instruments or currencies mentioned in this document. You are advised to make your own independent judgement with respect to any matter contained herein. In the UK SCB conducts designated investment business only with Market Counterparties and Intermediate Customers and this document is directed only at such persons. Other persons should not rely on this document. Standard Chartered Bank is incorporated in England with limited liability by Royal Charter 1853 Reference ZC18. The principal office of the Company is situated in England at 1 Aldermandbury Square, London EC2V 7SB. Standard Chartered Bank is authorised and regulated by the FSA under FSA regulation number VAT number GB