Risk Latte - Zero Cost Exotic Structure

The following deal was supposedly done recently by the trading desk of a large bank in Hong Kong:

Zero Cost Exotic Structure

Jan 24, 2005

(The currency pair and figures/values are adapted from the original deal)

The bank sold a zero cost USD-INR exotic structure with double knock-outs and knock-ins (exotic barrier option) to a client who wanted to hedge their USD exposure. The client is an exporter and has revenues in USD and its base currency is in Indian Rupee.

USD-INR spot was at 43.667 and the structure was:

Client Buys:

  • $10 mil USD of 44.85 INR call; double Knock-out 42.36/40.45 expiry 3 months;
  • $10 mil USD of 44.20 INR call; double knock-in 42.36/40.45 expiry 3 months.

Client Sells:

  • $20 mil USD of 44.20 INR put double Knock-in 42.36/40.45 expiry 3 months.

The overall cost of the structure in real life case - the premium paid by the client to the bank to buy the structure - is supposed to be zero.

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