RAMMSTEIN STEEL

RAMMSTEIN STEEL
HEDGING STRATEGIES FOR
EXPORTING TO THE UK
Adam Ferguson, Andreas Hjelde & Mike Monaghan
Recommendation and summary
y
Recommendation:
Rammstein Steel should buy a synthetic long put to
hedge the market view of down and highly volatile.
…
Summary:
Rammstein Steel has entered a long forward contract
with Rolls-Royce
Rolls Royce 29 September 2008 with delivery
of high grade steel. Rammstein Steel will receive
GBP 100 mill 17 December 2008.
…
Contents
…
…
…
…
…
…
…
…
Company background
Project definition
Value at Risk
Market data
F
Forecasts
Market outlook
Map of alternatives
Hedging positions
Company
p y background
g
…
…
…
…
Rammstein Steel is a successful steel producer
specializing in steel manufacturing for the auto
industry.
y
The company has recently entered an agreement
with Rolls-Royce
y in the UK.
29 September 2008 Rammstein Steel agreed with
Rolls-Royce to receive a payment 17 December
2009.
The amount is GBP 100 mill.
Project
j definition
…
…
…
…
…
…
Our current exposure is a long forward worth GBP 100
mill in revenues which is due 17 December 2008. (+F)
Future 17 December is 1.8132 USD/GBP
/
$ Underlying exposure is $181,320,000.
Treasuryy department
p
wants to reduce down side loss on
revenue.
Treasury department requires a maximum loss of 5%
with a 5% probability (1.645 std dev).
The risk limit is $9,066,000.
VaR for December
Today
9/29/08
Future price:
1 8132
1.8132
Risk limit
-9,066,000
# Contracts
Exposure: 1600
underlying: 62,500
# SD VaR: 1.65
6
Maturity date: 12/17/2008
79 days period
Monthly estimate
Riskmetrics inferred
Lower
Price
1.7089
1.6550
Loss on
position
-5,774,522
Upper
price
1.9270
1.9993
Gain on
position
6,301,581
10,669,752
Monthly volatility: 3.55
Annual volatility: 12.63
$ Underlying:
181,320,000
Adjustment -683
6
Keep: 917
Funding rate: 2%
Risk premium: 1.5%
V@R Center and Confidence Interval
50%
40%
-9,066,000
30%
20%
10%
1.6495
0%
1 30
1.30
1 40
1.40
1 50
1.50
1 60
1.60
1 70
1.70
1.8171
1 80
1.80
2.0018
1 90
1.90
2 00
2.00
2 10
2.10
2 20
2.20
2 30
2.30
Market data
Dec Options
Strike
Premium
FV Premium
Call ATM
181
4.2
4.23
Call OTM
185
2.85
2.87
Put ATM
181
3.88
3.91
Put OTM
177
2.31
2.33
Futures price: maturity 17
December 2008
1.8132
USD/GBP:
/
Recent historyy and forecast
USD/GBP ratio
Source: Forecasts.org
Forecast II
…
Interest rate parity suggests further depreciation of
the GBP to the USD
USD/GBP forward calculated
7
6
1.8200
5
1 8000
1.8000
4
1.7800
3
2
1
US interest rates
UK interest rates
1.7600
1.7400
1.7200
0
1.7000
Source: Prof. Bodurtha’s Financial Services
USD/GBP forward
calculated
Forecast III
BP Dec 2008 (BPZ8) Futures Prices, Implied Vols, 30-Day Historical Vols, 12/20/2008 Market-Based
(RP) Forecasts and Riskmetric Monthly Vol (12.63% annualized) Likely Range , a/o 9/29/2008
2.10
2.05
2.00
Futures Price = 1.8132, RP = 1.5%, R = 2.0%, &
Forecast = 1.8193
Riskmetrics CP+ = 1.9251, 111 day Max =
2.0814 & Min = 1.8388
Riskmetrics CP- = 1.7078, 111 Day Max =
1.8955 & Min = 1.6594
16.0
Historical 14.69
Implied = 11.67
1.95
P
1.90
r
i
1.85
c
e
1.80
1.75
1.70
1.65
Expected Vol
= 13.02
14.0
12 0
12.0
CP+=1.9251
10.0
8.0
F=1.8132
Expect ed Market
L
= 1.8193
i
k
e
l
y
CP-=1.7078
R
a
n
g
e
6.0
4.0
2.0
0.0
V
o
l
a
t
i
l
i
t
y
Market outlook and trends
Economy
… The UK economy is suffering from the recession so the Bank
of England has decreased and will continue to decrease the interest
rate
… There is uncertainty about the world economy due to sub
prime mortgage woes and the rising current account
deficit. As a consequence,
q
, Rammstein Steel expects
p
high
g volatilityy on
the GBP.
Recent signs of pound weakness
… GBP near record low compared
p
to US dollar.
… British Pound has dropped well below $1.85 barrier.
… Bank of England reluctant to raise rates despite mild inflationary.
fears.
Rammstein’s view
Direction
Down
Certainty
Unsure, ie high volatility
Rammstein’ view is in accordance with
market
k t consensus
Source: Yahoo Finance
Map
p of alternatives
Level of confidence
Market view | Vol. view
Low
Stable
High
Up
p
X
X
X
Neutral
X
Alternative II: Synthetic
short straddle
Alternative III: Long
straddle
Down
X
Alternative I: Forward
hedge
Recommended
position: Synthetic long
put itm
Hedging
g g strategies:
g
Current position
p
L or S (Long/Short)
(L
/Sh t)
L
F, C, or P (Forward, Call, Put)
F
Forward/Strike Price
1.8132
Price (C or P), 0.0 (F) - FV
0.00
Number of Contracts
1600
Prices at
Maturity
Step size
0.055
Input futures price
Strike F9
to update
p
@ Critical
Prices
Long Forward Position
Calculate
d Profit
of a
Long
Forward
Position
1.4832
1.5382
1.5932
1.6482
1.7032
1.7582
600.0000
400.0000
200.0000
-528.0000
-440.0000
-352.0000
352.0000
-264.0000
-176.0000
-88.0000
Total
-33,000,000.00
-27,500,000.00
-22,000,000.00
22,000,000.00
-16,500,000.00
-11,000,000.00
-5,500,000.00
0.0000
88.0000
176.0000
264.0000
352.0000
440.0000
528.0000
0.00
5,500,000.00
11,000,000.00
16,500,000.00
,
,
22,000,000.00
27,500,000.00
33,000,000.00
1.6495 -261.9912
2.0018 301.7090
-16,374,450.22
18,856,809.40
1.8132
1.8682
1.9232
1.9782
2.0332
2.0882
2.1432
0.0000
-200.0000
-400.0000
-600.0000
1 4832 1.5932
1.4832
1 5932 1.7032
1 7032 1.8132
1 8132 1.9232
1 9232 2.0332
2 0332 2.1432
2 1432
Price at Contract Maturity
Recommended position: Synthetic long
put itm
L or S
(Long/Short)
L
S
L
F, C, or P
F
F
P
Forward/Strik
e Price
1.8132
1.8132
1.8132
Price (C or P),
0 0 (F) - FV
0.0
0 0000
0.0000
0 0287
0.0287
0 0391
0.0391
Combined +1600F-1600F+3700P
P iti
Position
1200.0000
1000.0000
800.0000
600.0000
400.0000
Number of
Contracts
1600
1600
200.0000
3700
0.0000
Calculated
Profit of a
-200.0000
Combined
+1600F1600F+3700
P Position
Prices at
Maturity
Step size
0.055
Input
-400.0000
00 0000
-600.0000
+1600F
-1600F
+1600F1600F+370
+3700P
0P
1.4832 -528.0000
528.0000
1076.3300
1076.3300
67,270,625.0
1.5382 -440.0000
440.0000
872.8300
872.8300
54,551,875.0
1.5932 -352.0000
352.0000
669.3300
669.3300
41,833,125.0
1.6482 -264.0000
264.0000
465.8300
465.8300
29,114,375.0
1.7032 -176.0000
176.0000
262.3300
262.3300
16,395,625.0
-88.0000
88.0000
58.8300
58.8300
3,676,875.0
1.7582
Profit
1.813
2
0.0000
0.0000
-144.6700
-144.6700
-9,041,875.0
1.8682
88.0000
-88.0000
-144.6700
-144.6700
-9,041,875.0
1.9232 176.0000
-176.0000
-144.6700
-144.6700
-9,041,875.0
1.9782 264.0000
-264.0000
-144.6700
-144.6700
-9,041,875.0
2 0332 352.0000
2.0332
352 0000
-352
352.0000
0000
-144
144.6700
6700
-144
144.6700
6700
-9
9,041,875.0
041 875 0
2.0882 440.0000
-440.0000
-144.6700
-144.6700
-9,041,875.0
2.1432 528.0000
-528.0000
-144.6700
-144.6700
-9,041,875.0
@ Critical 1.6550 -253.0697
Prices 1.9993 297.8371
253.0697
440.5538
440.5538
27,534,611
-297.8371
-144.6700
-144.6700
-9,041,875
Futures=>
Price
-800.0000
1
2
2
2
2
2
2
Price at Contract Maturity
+1600F
-1600F
Will gain on an estimated depreciation of
the GBP, but will lose within risk limit on an
appreciation
Alternative I: Forward hegde
g
L or S
(Long/Short)
F, C, or P
(Forward,
Call, Put)
Forward/Stri
ke Price
Price (C or
P), 0.0 (F) FV
L
S
F
F
1.8132
1.8100
Combined +1600F-698F Position
600.0
400.0
0.00
0.0000
1600
698
200.0
Number of
Contracts
Calculate
d Profit
of a
0.0
Combine
d +1600F+1600F
698F
Position
+1600F
Prices at
-200.0
-698F
+1600F698F
Profit
Step size
0.055
1.4832-528.0000 228.1064 -299.8936 18,743,350.0
1.5382-440.0000 189.7164 -250.2836 15,642,725.0
1 5932-352 0000 151.3264
1.5932-352.0000
151 3264 -200.6736
-200 6736 12,542,100.0
12 542 100 0
1.6482-264.0000 112.9364 -151.0636 -9,441,475.0
Input
1.7032-176.0000 74.5464 -101.4536 -6,340,850.0
1.7582 -88.0000 36.1564 -51.8436 -3,240,225.0
Maturity
-400.0
-600.0
1.483 1.593 1.703 1.813 1.923 2.033 2.143
Price at Contract Maturity
1.813
2
Futures=>
Price
Strike F9
to update
0.0000
-2.2336
-2.2336 -139,600.0
1.8682 88.0000 -40.6236 47.3764 2,961,025.0
1.9232 176.0000 -79.0136 96.9864 6,061,650.0
1.9782 264.0000 -117.4036 146.5964 9,162,275.0
2.0332 352.0000 -155.7936 196.2064 12,262,900.0
2.0882 440.0000 -194.1836 245.8164 15,363,525.0
2.1432 528.0000 -232.5736 295.4264 18,464,150.0
@ Critical 1.6550-253.0697 108.1681 -144.9017 -9,056,354
Prices 1.9993 297.8371 -132.1650 165.6721 10,354,505
Will still
till llose on an estimated
ti t d
downside, but gain on an upside.
Alternative II: Synthetic
y
short straddle
L or S
(Long/Sh
ort)
F, C, or P
(Forward,
Call, Put)
Forward/
Strike
Price
Price (C
or P),
o
), 0.0
00
(F) - FV
Number
of
Contract
s
Combined +1600F-3000C
Position
L
S
F
C
600.0000
1.8132
1.8100
400.0000
0.0000
0.0423
200 0000
200.0000
0.0000
1600
3200
-200.0000
Calculated
Profit of a
Combined
+1600F3200C
Position
Prices at
Maturity
Step size
0.055
@ Critical
Prices
-600.0000
+1600F
-3200C
+1600F3200C
Profit
1.4832
1.5382
1.5932
1.6482
1.7032
1.7582
-528.0000
-440.0000
-352.0000
-264.0000
-176.0000
-88.0000
88.0000
135.3600
135.3600
135.3600
135.3600
135.3600
135.3600
-392.6400
-304.6400
-216.6400
-128.6400
-40.6400
47.3600
-24,540,000
-19,040,000
-13,540,000
-8,040,000
-2,540,000
2,960,000
1.9232
1.9782
2.0332
2.0882
2.1432
0.0000
88.0000
176.0000
264.0000
352.0000
440.0000
528.0000
125.1200
-50.8800
-226.8800
-402.8800
-578.8800
-754.8800
-930.8800
125.1200
37.1200
-50.8800
-138.8800
-226.8800
-314.8800
-402.8800
7,820,000
2,320,000
-3,180,000
-8,680,000
-14,180,000
-19,680,000
-25,180,000
1.6550
1
6550 -253.0697
-253 0697
1.9993 297.8371
135 3600
135.3600
-470.5543
-117 7097
-117.7097
-172.7171
-7 356 859
-7,356,859
-10,794,821
Input
Futures=> 1.8132
Price
1.8682
Strike F9
to update
-400.0000
-800.0000
-1000.0000
1
2
2
2
2
2
2
Price at Contract Maturity
Will not gain on high volatility,
which is expected
Alternative III: Long
g straddle
L or S
(Long/Short)
F C,
F,
C or P
(Forward,
Call, Put)
Forward/Stri
ke Price
Price (C or
P), 0.0 (F) FV
L
L
F
P
1.8132
1.8100
0.0000
0.0391
1600
3200
Combined +1600F+3200P
Position
1000.0000
800.0000
600.0000
Number of
Contracts
400.0000
Calculated
Profit of a
Combined
+1600F+3200P
Position
Prices at
Maturity
Step size
0.055
Input
1.4832
1.5382
1.5932
1.6482
1.7032
1.7582
1.813
2
Futures=>
200.0000
0.0000
+1600F
+3200P
+1600F+
3200P
Profit
-528.0000
-440.0000
-352.0000
-264.0000
-176.0000
-88.0000
920.5945
744.5945
568.5945
392.5945
216.5945
40.5945
392.5945
304.5945
216.5945
128.5945
40.5945
-47.4055
24,537,157
19,037,157
13,537,157
8,037,157
2,537,157
-2,962,843
Price
1.8682
1.9232
1.9782
0.0000
88.0000
176.0000
264.0000
-125.1655
-125.1655
-125.1655
125.1655
-125.1655
-125.1655
-37.1655
50.8345
138.8345
-7,822,843
-2,322,843
3 177 157
3,177,157
8,677,157
Strike F9
to update
2.0332
352.0000
-125.1655
226.8345
14,177,157
2.0882
2.1432
440.0000
528.0000
-125.1655
-125.1655
314.8345
402.8345
19,677,157
25,177,157
-253.0697
370.7340
117.6643
7,354,016
297 8371
297.8371
-125.1655
125 1655
172 6716
172.6716
10,791,978
10
791 978
18,145,994
1.655
0
1.999
Prices
3
Sum
@ Critical
-200.0000
00 0000
-400.0000
-600.0000
-800.0000
1
2
2
2
2
2
2
Price at Contract Maturity
Will gain on changes in the price
either direction, but we will gain
more with a synthetic long put
Recommendation and analysis
y
…
Consistent with a market view that expects a
depreciation of the British Pound and a highly
volatile market;; we recommend Rammstein Steel
constructs a synthetic long put. It has a maximum
downside risk of % 9.04 mill. That is within our loss
limit.
Rammstein Steel Advisory
y Team