Somewhat ironically, it is our observation that structured option products for FX hedging are heavily used by small-to-mid sized commercial firms and often overlooked by larger organisations. Many treasury policies exclude exotic options, unless approved by the board as an exception. No question there is a level of complexity about structured options but they do have a place in a hedging programme when trying to achieve extra FX gains, within acceptable risk parameters. We have witnessed first-hand simple businesses that have an FX hedge portfolio entirely made up of complex structured options, arguably inappropriate for the size and (non) complex nature of the business. At the other end of the spectrum there are sophisticated companies with experienced treasury personnel that are prohibited from transacting any “non-vanilla” structures.
As with most things in life it is about striking a balance. A hedge portfolio should consist of a mix of instruments from the vanilla end of the spectrum such as FX forwards, to the more esoteric such as barrier options and leverage. Crucially, the company entering the option structure must understand the potential outcomes. The litmus test for this is being able to explain it to management/the board.
Trying to manage these instruments within a spreadsheet is a fraught exercise and will likely lead to misrepresenting the hedge profile. The sellers of these type of options e.g. banks and FX brokers, want to ensure they have done so in an entirely responsible manner. New regulations such as PRIIPS put the onus on sellers of options to ensure the buyer understands exactly what they are committing to. From the buyers perspective, understanding the hedge position and the potential profitability impact from movements in exchange rates is vitally important.
Hedgebook has continued to add to its library of instruments – the latest being knock-ins and knock-outs. Although these types of instruments may not be suitable for everyone, Hedgebook provides the confidence to both the banks/brokers selling option structures, and the companies buying them, that they are being sold/managed appropriately and any future surprises at expiry are removed. The recent return of volatility to financial markets has served as a reminder of how quickly conditions can change.
Related article: https://www.hedgebookpro.com/blog/impact-path-dependent-options/