CitiFX: Investing in FX - Structured Products · PDF fileBullish view that as commodity prices...

CitiFX: Investing in FXAccess to FX as an asset class via systematic investment strategiesPhilip Brass Value Added Products+44 20 7986 1614
November 2009Past Performance is Not Indicative of Future PerformanceFor Institutional Investors and Professional Advisors Only Not for Onward Distribution
Mehdi GzouliFX Structuring+44 20 79863147

2 | Structured Products Europe: Retail Structured Products 16 November 2009
FX as an Asset Class
The Foreign Exchange market is the worlds largest and most liquid with an average daily traded value of USD 3.2 trillion Majority of transactions done by non-profit oriented participants such as central banks, corporations, passively managed investment funds and touristsInefficiencies exist as a result. These present an opportunity for profit-oriented professionals to generate alpha in a variety of trading environments
The Foreign Exchange market is the most traded market in the world. Despite being the worlds largest and most liquid, it is not the most efficient
BIS Triennial FX Market Survey: Reported Turnover by Counterparty
% T
urno
ver b
y C
ount
erpa
rty Daily Average Turnover
Financial Institutions (Including Passive) Corporations, Central Banks
Individuals and Others Daily Average Turnover, US$bn
20% 20% 28%33% 40%
17%
14%17%
69% 64% 64%59% 53%
43%
13%
13%
18%16%
1,970
$3,210
1,420$1,650$1,150
$880
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1992 1995 1998 2001 2004 20070
500
1000
1500
2000
2500
3000
3500
Source: BIS December 2007 Triennial Report.

Currency Cycles Reflect Macro EnvironmentGBP/USD Spot Rate
Bretton-Woods Collapses: GBP
Free Floating
1976 Sterling Crisis
IMF Loan to the UK
Fed Fund Peaks at 20%
Fiscal Austerity under Tory government
Plaza Accord
Louvre Accord
Black Monday Stock Market Crash
Berlin Wall Fall
Pound joined ERM and is pegged at 2.95 DM/
Black Wednesday, Pound leaves
ERM
Coordinated Central Banks intervention to
support US Dollar
Russian Crisis / LTCM
East Asian Crisis
introduced in 11
countries
NASDAQ peaks
9/11
Invasion of Iraq
Fed Fund hits 1% Low
Homeland Investment Acts signed
into Law (US)
BoE rates reach 5.75%
Carry Trade OnCredit Crunch Starts
Lehman Collapses
Panic Around
Financial Sector
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6
2.8
Jan-
71
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72
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Yield Enhancement

1-Month USD Dual Currency Deposit Linked to GBP/USD
USD 1 millionNotional
0.15% p.a.1 MonthBenchmark Rate
1 MonthMaturity
1.6200Strike
GBP/USD and indication of the conversion level of the strategy
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
02-Jan 02-Feb 02-Mar 02-Apr 02-May 02-Jun 02-Jul 02-Aug
Spot
Conversion Level
Redemption in GBP
Redemption in USD
Principal Redemption
Note: Whilst this investment is a Deposit, capital may be subject to currency risk. Principal redemption is subject to the Deposit being held to maturity and the credit risk of the Issuer and Guarantor. GBP/USD fixing availbale on Reuters page ECB37.
Investor
Maturity Date USD PaymentUS$1million and
US$1,000,000 x 8% x n/360
Trade DateUS$1 million
GBP Payment617,284 and
1,000,000 x 8% x n/360 x 1/1.6200
Investor
Citi
Citior

EUR/USD Wedding Cake 100% Capital Protected1
0.35% p.a. (Act/360)DepositBenchmark
EUR 1 millionNotional
1 YearMaturity
1.5000EUR/USD Spot
Path of EUR/USD Spot with Indication of the Levels of the Structure
Interest Rate Profile of the Structure
0%
2%
4%
6%
8%
10%
12%
1.2 1.25 1.3 1.35 1.39 1.43 1.48 1.53 1.58 1.62 1.66 1.71
Rat
e %
p.a
.
EUR/USD Spot at Expiry
1.2
1.3
1.4
1.5
1.6
1.7
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
C
Range 1 Range 2
(1) Capital Protection subject to investment being held to maturity and credit risk of Issuer and/or Guarantor
Rationale: EUR/USD will be range bound over the next year. This investment is 100% Capital Protected at Maturity.If EUR/USD trades within Range 1 at all times, investor receives 10% p.a. coupon. If EUR/USD trades within Range 2 at all times, investor receives 5% p.a. coupon.

Triple Currency Coupon Payment100% Capital Protected1
1.62% p.a. (Act/360)DepositBenchmark
USD 1 millionNotional
3 yearMaturity
AUD (Australian Dollar)Currency 1NOK (Norwegian Krone)Currency 2SGD (Singapore Dollar)Currency 3
Rationale: Broad USD weakness as wealth shift to Asia and Commodity exporting nations
Major Commodity Exporter: iron-ore, gold, wheat, coal
Experienced a mild recession compared to other advanced economies
The Australian Central Bank has started hiking rates in October 2009
Oil and gas rich: 7th largest oil exporter and 3rd largest natural gas exporter
Norway holds $450bn of reserves in its Sovereign Wealth Fund
The stable and low unemployment rate points to a clear recovery (CitiFX Strategy 29-October-09). Central Bank started rising rates in November 2009
Key business centre in the Asia-Pacific area
Will benefit from the rise in the Asian consumer
Singapore has amassed ~$350bn of reserves in its 2 Sovereign Wealth Fund
Have AUD, NOK and SGD all appreciated against USD?
100% Capital100% Capital + 10% p.a.Year 3
0% 8% p.a.Year 2
0% 6% p.a.Year 1
NoYes

Macro View Through Baskets

Vanilla Baskets that Express a Macro View
Note: Assuming CFI funding and 100% Protection at maturity.
These currencies have not yet returned to their pre-Lehman levels and countries with sound fundamentals and bullish forecasts
As the markets normalise from the panic of late 2008-early 2009 these currencies resume trading at their pre-crisis levels
INR: Indian Rupee (vs USD)IDR: Indonesian Rupiah (vs USD)NOK: Norwegian Krone (vs USD)PLN: Polish Zloty (vs USD)
RECOVERY
Hungary and Poland are export-driven economies selling essentially to Western Europe. Investors here express a view that as trade picks up these currencies will appreciate vs USD
Russia, Hungary and Turkey are also currencies that offer high yield to investors
HUF: Hungarian Forint (vs USD)PLN: Polish Zloty (vs USD)RUB: Russian Rouble (vs USD)TRY: Turkish Lira (vs USD)
CEEMEA
These currencies derive a significant amount of their wealth from exporting commodities
Bullish view that as commodity prices rise, these currencies will too vsUSD
AUD: Australian Dollar (vs USD)BRL: Brazilian Real (vs USD)NOK: Norwegian Krone (vs USD)RUB: Russian Rouble (vs USD)
COMMODITIES
Bullish the Asian currencies vs USDINR: Indian Rupee (vs USD)IDR: Indonesian Rupiah (vs USD)PHP: Philippine Peso (bs USD)SGD: Singaporean Dollar (vs USD)
ASIA
Bullish the BRIC currencies vs USDBRL: Brazilian Real (vs USD)RUB: Russian Rouble (vs USD)INR: Indian Rupee (vs USD)CNY: Chinese Renminbi (vs USD)
BRIC
RationaleCurrenciesBasket

Examples of payouts using BasketsPlain Vanilla Basket Redemption - 100% Capital Protection1
100%
110%
120%
130%
140%
150%
160%
170%
80% 90% 100% 110% 120% 130% 140% 150% 160% 170%
Performance
Red
empt
ion
Digital BRIC Basket Note 100% Capital Protection1 Lock-in BRIC Basket Note 100% Capital Protection1
Rationale: Investor seeks 100% capital protected product offering exposure to a currency basket.
Currency1 25%
Currency4 25%
Currency2 25%
Currency3 25%
100%
105%
110%
115%
120%
125%
130%
135%
140%
145%
80% 90% 100% 110% 120% 130% 140% 150%
Performance

CitiFX: Investing in FX - Structured Products · PDF fileBullish view that as commodity prices...

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