20180606-法国巴黎银行-History_doesn_t_repeat_itself,_but_it_rhymes__bulking_up_the_FRA_20s21s_9页_396kb

Summary of the LATIN AMERICA STRATEGY Document

Core Content

This document outlines the current strategy and outlook for the DI (Discount Rate) market in Brazil, focusing on the FRA (Forward Rate Agreement) 20s21 (January 2020 to January 2021). The strategy involves receiving DI rates and managing exposure through various financial instruments.

Main Strategy and Positions

• Current Strategy: The main structural strategy in Brazil is receiving the DI FRA 20s21.
• Entry and Exit Points:
  • Entered the position at 10.60% and closed at 9.55%.
  • Re-entered at an average price of 10.48%.
  • Increased the position by USD 10k DV01 at 11.03% (on-shore).
  • Total allocation is now USD 60k DV01.
• Target Adjustment:
  • The target has been adjusted to 10.25% (from 9.75%).
  • At this point, market conditions will be reassessed to determine if the target should be extended.

Key Views and Insights

• Market Dynamics:
  • The DI market is analyzed similarly to volatility, with periods of steady momentum followed by sudden tail events.
  • These tail events are seen as attractive entry points.
• Political Scenario:
  • The political environment has deteriorated, shifting the focus from "what could be wrong?" to "what could possibly be right?".
  • Despite the uncertainty, the team does not consent to unfounded market prices and continues to arbitrate positive pay-out opportunities.
• Risk Premium:
  • The increase in uncertainty should lead to a higher risk premium along the curve.
  • However, current levels are significantly above the team's worst-case scenario for the short end and belly of the curve.

Outlook Update

• Market Dysfunction:
  • The DI market has been trading in a dysfunctional manner in the last week.
• Hedging Strategy:
  • A USDBRL call spread 1x2 at 4.00-4.40 (USD 100mn and USD 200mn) maturing in November 2018 has been entered to hedge and protect existing positions.
• Recommendation:
  • The team prefers to focus on the FRA 20s21 rather than extending duration, even though long-end levels are unusually high.

Tables and Charts

• Table 1 provides market and model values for various DI rates:
  • DI Jan-19: Market 6.95%, Model 6.72%, Gap 23 bp
  • DI Jan-20: Market 8.02%, Model 7.80%, Gap 22 bp
  • DI Jan-21: Market 9.21%, Model 8.16%, Gap 105 bp
  • DI Jan-22: Market 10.40%, Model 9.35%, Gap 105 bp
  • DI Jan-23: Market 11.25%, Model 9.67%, Gap 158 bp
  • DI Jan-25: Market 12.19%, Model 9.58%, Gap 261 bp
• Chart 1-2 visually represents the DI curve, market values, and model values.

Quotes and Reflections

• A quote from Arthur Schopenhauer is included, highlighting the importance of regulating attention to market warnings to avoid unnecessary alarm.

Legal and Disclaimer Information

• The document is a marketing communication and not investment research.
• It does not constitute an offer to sell or issue any financial instrument.
• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed.
• The information is based on public sources and is not guaranteed to be accurate or complete.
• No liability is accepted for any use of the document or its content.
• The document is for the use of intended recipients only and may not be reproduced or distributed without prior written consent.

US Disclosures

• Options are complex and not suitable for all investors.
• ETFs carry risks including tracking error, currency, and geopolitical risks.
• BNPP may have conflicts of interest and may act as an Authorized Participant, market maker, or advisor for ETFs.
• Certain securities discussed may be "restricted securities" and only available to Qualified Institutional Buyers or non-US persons.

Distribution Jurisdictions

• The document is distributed in various jurisdictions by BNPP subsidiaries and affiliates, with specific regulatory authorizations and supervision.
• It is important to note the legal and regulatory frameworks in each country, including authorizations from the ECB, ACPR, BaFin, FSMA, AFM, and others.

Conclusion

The document emphasizes the team's strategy of receiving DI FRA 20s21, adjusting positions based on market dynamics, and maintaining a cautious approach to risk management. It highlights the importance of understanding the market context and the legal implications of the strategies discussed.