“Without continual growth and progress, such words as improvement, achievement, and success have no meaning” – Benjamin Franklin

Positive growth figures from China helped energise global equities throughout the week, with bourses also driven higher by reassuring earnings reports from US banks, spurring investors back into risky asset classes worldwide.

The FTSE had its best week of the year after reports from Goldman Sachs and JP Morgan pushed banking stocks higher around the globe, the US’s S&P 500 index also having its best week since March. Sterling jumped on the back of the equity rally, and finished the week up a percent against the dollar and euro.

The Chinese GDP figure of 7.9% was just shy of the target rate of 8% growth for the year which outstripped analyst’s forecasts for the booming manufacturing powerhouse. This bullish result was not isolated however, with Singapore also surging a whopping 20% for their second quarter growth figure, underlining how strong the rebound in emerging markets throughout Asia is going.

It wasn’t all good news however, as late in the week black clouds were on the horizon as CIT, an American financial institution with heavy exposure to small and medium sized enterprises revealed it was on the verge of bankruptcy. News out this morning is that it has been thrown a lifeline by existing bondholders, so watch this space. There was also disheartening US retail sales figures, and a weak Philadelphia Fed manufacturing result stressing the US economy may still require further stimulus to kick it into some growth.

Commodity currencies generally performed strongly over the week, the Australian dollar and New Zealand dollar rising as raw material prices also rallied. This was despite the early week hiccup for the kiwi, as Fitch downgraded the economy to a ‘negative’ rating. The yen was sold off heavily, as is expected with rising risk appetite.

GBP will be the centre of attention for much of the week. Bank of England minutes arrive on Wednesday, and retail sales figures are due Thursday, however the most anticipated piece of data will be a preliminary estimate of the UK’s GDP figures as growth is once again in the limelight. Tuesday sees the Bank of Canada deliver an interest rate decision, and Wednesday sees Fed Chairman Ben Bernanke deliver a semi annual Monetary Policy Report

This week’s trade of the week is a strategy rather than an option, and is called the ‘ratio forward’. It is a synthetic combination of two existing strategies (the participating forward and convertible forward) that are weighted 50% each. For a seller of sterling and a buyer of dollars, this client took advantage of the rising pound, hedging themselves until the end of the year.

When combined, these strategies mean that the client was able to guarantee a worst case rate (WCR) of 1.61. If spot at expiry had never traded at or above 1.75, the client was able to benefit in 75% of the favourable movement. If 1.75 is ever touched, then half of the exposure is reverted to a forward at 1.61, and you continue to benefit in 25% of any further favourable movement.

This strategy requires no premium, and is relevant for other currency pairs. As there is a potential strengthening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight WCR.

For full details of this structure please contact one of our options traders on 0207 801 9050

Have a great week