The week has begun with a ferocious appetite for risk catalysed by the news that the bail out of Greece has been finalised and full details of it released. As expected, the burden of providing the majority of this stimulus has fallen on the shoulders of Germany. It is a slightly more complicated deal than first anticipated with Eurozone governments providing 30 billion euros and the IMF providing 10 billion euros (IMF involvement was one of Germany’s main demands if a rescue package was to be agreed).  The interest rate too is larger than usual for an IMF aided country with the European portion of the debt being charged at 5% fixed.  This detail filled in the gaps in the pledge made in Brussels on 25 March in an attempt to calm the market having seen the initial announcement fail to do so.

Initial reports suggest the announcement has served its purpose, despite the Greek government coming out and expressing its desire to borrow on the market, at a higher rate, and not take up the offer. However, the spread between Greek 10 year bonds and the German equivalent has come in since this latest announcement. It is seen as a measure of stability and to see it narrow is a good sign for Greece.

In the wake of the news, trading on global markets began intensely today.  Risk was king and as such sterling made gains against the commodity currencies but was pegged back against the euro. Against the dollar the pound traded in its range.

The big news int he UK is still very much the Election and with the first full week of campaigning on  the go we can only reiterate our mantra “expect volatility”. Today sees the unveiling of the Labour manifesto and will be followed in succession by Conservative and Liberal Democratic manifestos, respectively. Certainly the stand out event on the political calendar this week is Thursdays first ever leaders’ debates in British electoral history. With the economy firmly centre stage for Election ’10 we hope that more will be revealed by the parties of their plans to cut the deficit.

The week as a whole is rather quiet with the only pieces of information of note from Europe, their trade balance on Thursday and CPI on Friday. Trading will find direction as market digests the new details of the package and see how stock and bonds behave.  Greece is still the word over the comping days and weeks.

Trade of the week

This week’s trade of the week is the ‘leveraged convertible forward’ which in this case allows the client to hedge a worst case rate at the same level as their forward rate would be.

For a seller of GBP and a buyer of USD, this client was able to hedge forward over a  6 month tenure. They were able to achieve a worst case rate of 1.53 benefiting up to 1.64.

Should the rate touch 1.64 during the barrier period (1 month before the expiry date) then the client reverts to a forward at 1.53 (which is the level where he would have entered a forward contract). In this structure he has leveraged himself by a factor of 2:  should the rate touch 1.64 he has to buy £200,000 worth of dollars as opposed to the original £100,000.

This strategy is premium free and is also relevant for buyers of sterling and sellers of other currencies.

Have a good week.