UBS Warburg has launched a new FX product, UBS Currency Certificates, that are designed to help private investors hedge their portfolios against currency fluctuations, or for those looking to speculate on market movements. Execution can take place electronically via UBS Telebanking and UBS Tradepac, or by telephone and traditional dealing systems.
“We have launched this product into the e-world because it’s a highly standardised, easy to understand, transparent FX product that is suitable for the retail market and institutional clients who need a securitised instrument in their portfolio that is marked to market because it trades like a stock,” says Martin Wiedmann, managing director, treasury products, for UBS Warburg in Zurich.
The UBS Currency Certificate is designed to be used as either a currency overlay vehicle, or as a pure investment vehicle. The product itself is similar to contracts available on the IMM and to CFDs (contracts for difference) but is available only over-the-counter and is traded in much smaller contract sizes of $1,000/unit, in three currencies – US dollar, euro and yen. Live prices are available on UBSWDR27 or www.ubs.com under “quotes”. Duration is fixed at three months, and each month, UBS issues a new set of three month contracts so at all times there are contracts outstanding. Trading is offered 24-hours from Zurich, and Wiedmann says it will soon be expanded to overseas centres.
“This product closes a big gap in the market. Clients can conduct margin trading with a 10:1 leverage without actually needing a margin account,” says Wiedmann.
The currency certificates are suitable for either a bull or bear view on the market.
Assume that an investor expects the USD to appreciate over the next three months and thus buys a “UBS Currency Certificate USD/CHF July Bull” on the day of issue (29 March). Upon issue, the reference exchange rate of USD/CHF 1.6500 is fixed, and the certificates are issued at a price of CHF 1,650 (reference price) each.
If, upon expiry (1 July), the rate is CHF 1.7100, the investor will have predicted the market move correctly and will receive, in addition to the reference price, the difference between the closing rate and the reference rate upon issue multiplied by 10,000. Example: CHF 1,650 + (1.7100 – 1.6500 x 10,000) = CHF 2,250.
If, on the other hand, the closing rate is CHF 1.6200, this results in a payout of CHF 1,350 per certificate: CHF 1,650 – (1.6500 – 1.6200 x 10,000) = CHF 1,350. Another special feature of the certificates is that they incorporate an automatic sell order. This is triggered automatically if the value of the certificate drops below CHF 100. The remaining amount is paid out to the investor upon expiry.
Conversely, if the investor expects the USD exchange rate to fall subsequent to 29 March, he or she would opt for a “UBS Currency Certificate USD/CHF July Bear”.