1x2 Target Redemption Forward

This Video explains the functionality of the “Target Redemption Forward” at the Example of someone who buys EUR vs. CHF.

Product Description

You have already hedged part of your currency risk. Do you now wish to optimize another part of your unhedged foreign currency exposure? For this purpose UBS offers the “1x2 Target Redemption Forward”.

The objective of this solution is that – alongside existing hedging products – you can optimize part of your unhedged foreign currency exposure in order to achieve more attractive exchange rates.

It is important to note that this product does not offer complete currency hedging, since you have no clarity about the exact amount in advance.

Benefits

Possible Scenarios

To show you how this product works, we will take the example of buying euros against Swiss francs with 12 monthly fixings, in each case EUR 50,000 against EUR 100,000. The “target level” defines the maximum achievable gain of 10 rappen per euro. The advantage is that the exercise price – or “strike level” – is better than the current forward rate.

The same two scenarios apply to each of the 12 fixings: if the market rate is above the strike level, then you buy the single amount of EUR 50,000 and the target level is reduced by the realized gain. If the market rate is below the strike level, then you buy double the amount, that is EUR 100,000, without affecting the target level.

Let us show you three possible developments over the term of the product.

In the first case the market rate on the relevant fixings is sometimes above and sometimes below the strike level: in the end you buy the single amount at the cheaper strike level on four dates – buying EUR 50,000 on fixings 1, 2, 5 and 7. On the other three fixings the market rate is below the strike level; in these instances you buy EUR 100,000 at the strike level, double the amount because of the 1x2 leverage. In this scenario the product comes to an end after seven months because the maximum gain – the target level – has been achieved.

In the second case the market rate is above the strike level on each fixing: here you buy EUR 50,000 on fixings 1 and 2 – at the strike level instead of the more expensive market rate. On the third fixing you buy only the residual amount, since the maximum gain has already been achieved after three months. The term of the product ends here.

In the third case the rate is below the strike level throughout the 12-month term. On each date double the amount – EUR 100,000 – has to be bought. In the end you have unfortunately not been able to benefit from the target level and you buy EUR 100,000 a dozen times at the strike level.

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