— Hedging the fabric of risk
Example: one of our risk concepts and solutions — Vis à vis — Standard bank strategies
Risk begins at spot. That's why protection should start there too.
Because that's where risk is 'prime' — it's highest probability.
But if your protection begins above spot, you've got a risk gap.
Banks usually place this risk gap at 15% or more. That's too much to lose.
Any 'gap' in protection really implies acceptance of these losses.
Yet why should you accept them?
And why do banks promote them?
It's because it makes their job easier, and they don't have to re-engineer a strategy that doesn't work well.
They call it a 'Hedge budget' — an amount of market risk and loss that a company approves and is willing to accept.
That's great marketing — on their part, but it doesn't help you much.
Conservative risk management should begin at spot and it is up to innovative engineering to accomplish this — that's us, and that's what we do — because it's right.
This is also the concept behind swaps
Spot at 70; unlimited 'upside' protection; unlimited 'downside' risk. This is a basic swap, but there are many variations of a similar strategy.
— Take a look.
Forwards and swaps have unlimited protection at spot. Unfortunately, they also have unlimited risk at spot — and the difference between the two is market direction.
So the premise is right — protection at spot — it's the execution that's wrong.
However, 'collars' forget about spot
Spot at 70; risk gap 70-to-80; protection at 80-90; unlimited risk > 90; buffer protection spot to 60; unlimited risk < 60.
The above is an example, of which there are many variations.
—Take a look
Zero cost collars — the other Bank strategy — are not zero cost, just zero or net premium. Your cost is the high risk on both sides of the market.
First — on the 'upside' you're trying to hedge, — there is a 'gap' from spot of 15% (spot at 70, option at 80).
Then there's a 'thin strip' of protection (80 to 90), a little less than 15%. Then unlimited risk.
On the 'downside' from spot, there's a no-risk buffer zone of 15% (spot at 70 to 60), then unlimited risk.
This unlimited downside risk is how you pay for the call option 'strip'.
Is it worth it?
The result — too much risk, too little protection, too expensive, and no transparency.
But a call option at spot is perfect
Unlimited protection > 70; no risk < 70.
— Take a look
Believe it or not — there is a perfect hedge:
— 100% protection,
— 0% risk.
No matter market direction, you always win.
When prices go up — you're covered. When prices go down — no market losses, just cheaper prices.
Does it sound too simple?
Well, there's a catch.
The concept is perfect — protection at spot. The execution is perfect — no 'opposite side' risk.
Just one problem — it's expensive, really expensive.
So what's the solution?
We've got one.
Here it is:
Engineer a 'synthetic' call option* at spot.
Closely replicate call performance — but somehow* make it cheap, really cheap. That's on us.
Spot at 70; protection from 70 to 90; protection > 90. No risk < 70.
— Take a look
✓ Keep most of the 'upside' protection,
✓ eliminate all 'downside' risk,
✓ structure it as cheaply as a forward, most of the time
(so if you need an extended hedge, you can afford it);
✓ with all costs and calculations totally transparent — always.
Of course, we'd like to go into details, so let us know — because we've got a lot more to tell you, and other structures to show you.
Just give us your problem, and we'll build your solution