EXPLOITING THE TURKISH LIRA RISK REVERSAL TO STRUCTURE A HEDGING PRODUCT The Turkish Lira volatility seems skewed on the upside, a situation that creates an opportunity for Turkish corporates exporting in USD. Use Bloomberg’s FX Rate Forecast Model to see how implied volatility levels from the FX options market can translate into probabilities.

The model FXFM provides information on FX Type “USDTRY” in the amber box at the top left of the options market expectations driven by supply and demand screen. Click on ‘6M’ line in the table. At the bottom of the in the derivatives market. screen, tick the boxes next to ‘Current Spot’ and ‘Forward’.

1 Click here to see the six months probability distribution. 2 The probability distribution is positively skewed.

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FX Rate Forecast Model The FXFM function assesses the chances that a specific to the FX Option Valuation calculator that automatically FX scenario will be realized, shown as the area below the loads a risk reversal. Then, select ‘Client Sells’ in the red bell curve. The USDTRY currency pair has a bell curve ‘Direction’ field and choose ‘6 months’ for the Expiry. that is asymmetric. In other words, for this example, the OVML will solve for the strikes that give a zero cost probability of an upside move is higher on the right side ‘collar’, or ‘risk reversal’. of the curve. The larger distance between the USD Call Strike and the This specific situation is particularly good for Turkish Forward, and the USD Put Strike and the Forward shows corporates that receive USD and are looking to hedge the benefit of selling the higher volatility on the upside, their exposure. Type OVML USDTRY RR to go while buying lower volatility on the downside.

1 Select here ‘Client sells’ to price a collar for corporates that receive USD. 2 ‘OVML’ automatically solves for the strikes to get a zero cost sturcture. 1 3 This structure benefits from the higher volatility 2 on the ‘upside’.

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Risk Reversal Option Valuation

LEARN MORE To contact the author of this FFM article: Fabrizio Ferrini at +44 20 3525 8475 or [email protected] To suggest ideas for Functions for the Market or provide feedback: [email protected] >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> BEIJING FRANKFURT LONDON NEW YORK SÃO PAULO SYDNEY +86 10 6649 7500 +49 69 9204 1210 +44 20 7330 7500 +1 212 318 2000 +55 11 2395 9000 +61 2 9777 8600

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