FXWIREPRO: Hedge AUD/USD's Exporter Fx Risks on Long Term Forecasts and Events Via 2:1 Backspreads

FXWIREPRO: Hedge AUD/USD's Exporter Fx Risks on Long Term Forecasts and Events Via 2:1 Backspreads

4 April 2016, 15:58
Roberto Jacobs
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FXWIREPRO: Hedge AUD/USD's Exporter Fx Risks on Long Term Forecasts and Events Via 2:1 Backspreads

Over the longer-term, we expect AU growth to remain subpar and AUD to drift lower.

But, there have been a few key things to watch out in H2 of 2016.

  • The governor Stevens retires in Sept 2016 
  • Federal election must be held by Jan 2017 
  • AU’s current account deficit is also worth tracking 
  • In contrast, Federal Reserve's hikinng season should not be disregarded.

Although, AUD/USD pushed higher to the 2016 highs, the pair is forecasted to remain at 0.74 by Q2'2016, at around 0.72 by Q3'16 and travel towards 0.67 by the end of H2 of 2016.

Hedging Advice:

Overview: Investor thinks that the market will considerably be volatile within a broader band and also thinks that the AUD/USD would experience considerable downside risks in the long term.

We reckon this downside FX risks and advocate Put Ratio back Spreads to stay hedged to mitigate these risks in long run.

Two main reasons to prefer this strategy, firstly, this would serve as a better and economical strategy over any other as it contain more longs in puts and less shorts in puts.

Secondly, as and when IVs spike the longs in puts would likely serve hedging objectives as the premiums are directly proportionate to the underlying dips.

So the potential threat for FX receivables would be blocked by more number of longs. If it doesn't dip substantial on expiration you would still have entered the trade with reduced cost as you write ITM strikes. Because it is holder's right but not the obligation.

So here goes the strategy, purchase 6M (2%) Out of the money -0.36 delta put and 4M at the money +0.49 delta put and short 1M 1 lot of (1%) in the money put option. The short ITM puts funds to the purchase of the greater number of long puts and the position is entered for no cost or a net credit but the risk associated with this strategy is that there is a chance of exercising ITM shorts.

The underlying exchange rate has to make substantial move on the downside for the gains in long puts to overcome the losses in the short puts as the maximum loss is at the longs.

The material has been provided by InstaForex Company - www.instaforex.com

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