Structured product cancellation

DESCRIPTION:

  • Within clientÔÇÖs portfolio of interest rates hedging products, a 7-year deal linked to the yield curve and with a EUR 200m notional is identified.
  • The product bears very high interests when the yield curve is inverted.
  • Variance employs its advanced proprietary software tools to perform an in-depth risk analysis under different market scenarios (e.g. inverted yield curve, changes in Euribor rates, etc.).
  • Variance proposes cancelling the structured product and financing the premium through an extended annuity, taking advantage of market conditions at the time (mark-to-market of EUR 7.7m).
  • Variance provides trade execution transparency and helps the client to be in a good position to negotiate with the financial institution.

BENEFITS:

  • The client clears out any risk linked to yield curve inversion and all other components within the structured product, which present a significant worsening potential (i.e. productÔÇÖs cancelling price: EUR -12.9m).
  • The proposed annuity generates immediate interest savings worth EUR 350k per quarter, as the premium is spread over a longer period of time.
  • Although the restructuring is made with a different financial counterparty, the client can remove the original structured product from their books via a novation.
  • Variance provides trade execution transparency and provides the client with the tools that allow then to be in a good position to negotiate with the financial institution.

 

Chart: Cost of hedging product under different scenarios
The chart shows the amounts to be paid due to the hedging product under different market scenarios. The blue columns show the cost of cancellation of the product in the form of a series of quarterly payments extended in time as proposed by Variance.