20181025-法国巴黎银行-2y_forward_10s30s_steepener_with_long_payer_swaption_7页_967kb

Trade Idea Summary: Eurozone 2y Forward 10s30s Steepener with Long Payer Swaption

Document Overview

This document outlines a trade idea for a 2-year forward 10s30s euro interest rate steepener combined with a long 5y30y ATMF payer swaption. The strategy is based on the current low volatility environment and the potential for a rebound in volatility as the ECB moves away from its zero lower bound policy.

Core Content

• Trade Strategy: Pay 2y forward 10s30s euribor swap, combined with a long 5y30y ATMF payer swaption.
• Trade Horizon: 2 years.
• Entry Conditions:
  • Entry steepener: 25bp
  • Target steepener: 40bp
  • Stop loss: 15bp
• Notional Amount: EUR100k/bp
• Payer Swaption: Buy 20mn 5y30y ATMF payer swaption (X=1.76, vol=51) for a premium of EUR2.1mn (10.5% of notional).

Main Views

• Carry Opportunity: The 10s30s euro forward steepener offers a compelling carry of +30bp over a 2-year horizon.
• Volatility Risk: Although volatility is currently at historical lows, it is expected to rebound as the ECB moves away from the zero lower bound.
• Hedging Need: The long payer swaption is used to hedge against potential volatility increases. It has moderate time decay and high vega, making it an effective hedge.

Key Information

P&L Drivers

1. Steepener Movement:

   • Projected 15bp steepening over the 2-year horizon.
   • P&L from steepener: EUR1.5mn.

2. Volatility Rebound:

   • A repricing of volatility to 62 with 30y swaps moving up 50bp.
   • P&L from payer: +EUR900,000.
   • Total P&L: EUR2.4mn.

3. Delta Hedging:

   • A potential fourth P&L driver could arise from delta hedging the payer after large market moves.

Trade Construction

• Part 1: Pay 2y fwd 10s30s in EUR100k/bp.

  • Receive 103mn 2y10y @ 1.40%.
  • Pay 40mn 2y30y @ 1.65%.
  • Spread: 25bp.

• Part 2: Buy 20mn 5y30y ATMF payer swaption.

  • Premium: EUR2.1mn.
  • Vega: +40k/vol.
  • Delta: -20k/bp.

Main Risk Scenario

• Moderate Eurozone Growth Slowdown: A delay in ECB rate hikes may still be acceptable, with the 10s30s potentially bull-steepening more than projected.
• Sharp Growth Slowdown: Could lead to bull flattening in 10s30s, prompting the trade to be closed.
• Stop Loss: The trade will be stopped if the forward spread flattens to 15bp.

Figures and Analysis

• Fig 1: 10s30s flattened around year-end 2017 as the front end rose.
• Fig 2: 2y forward 10s30s now 30bp below spot.
• Fig 3: Both realized and implied volatility are expected to rebound.
• Fig 4: Slope disconnected from volatility in Q4 2017.
• Fig 5: Carry is very high relative to realized volatility of the 10s30s spread.

Legal and Regulatory Information

• This document is a marketing communication and not independent research.
• It is not intended for retail investors and is subject to various legal and regulatory disclosures.
• BNPP may have conflicts of interest due to its involvement in the financial instruments mentioned.
• The document is not a prospectus, and the information provided is for informational purposes only.
• The information may not be accurate or complete, and BNPP disclaims any liability for its use.

Important Disclosures

• Options: Complex instruments with high risk, suitable only for sophisticated investors.
• ETFs: May involve tracking error, currency, and geopolitical risks.
• Convertibles and Other Securities: May not be registered under US securities laws and are considered restricted.
• Distribution Restrictions: The document is distributed only to professional clients and relevant persons.

Conclusion

The trade idea leverages the current low volatility environment to capture carry from a 2y forward 10s30s steepener, while hedging against potential volatility rebound using a long 5y30y payer swaption. The strategy is based on the expectation that the ECB will eventually normalize rates, leading to increased volatility and potential steepening of the yield curve.