BNP Paribas has won Foreign exchange derivatives house of the year in the Structured Products Asia Awards 2017
Two years on from China's dramatic devaluation of its currency in August 2015, the event continues to cast a long shadow over the foreign exchange market. The 1.9% downward move, fuelled by the country's central bank to bolster economic growth, ushered in a new era of volatility in renminbi that has created headaches for both corporate hedgers and institutional investors.
"Since August 2015, renminbi has become much more volatile, and we have seen increased demand from Chinese exporters to hedge their renminbi cashflows and reduce risk in the case of further depreciation. Many corporates had previously borrowed in US dollars and other foreign currencies because the rate was cheaper – but with the reversal of renminbi, they now need to hedge that liability to avoid losses," says Henry Wong, head of forex structuring for the Asia-Pacific region at BNP Paribas.
The French bank has sought to tackle these challenges facing Chinese corporates with a range of unique, bespoke products. These include a euro/renminbi deleverage target knock-out forward, which deleverages by 20% on the client's potential downside every time the product is in the money at the euro/renminbi fixing.
"Renminbi has been depreciating since 2015, but exporters receiving payments in dollars or euros don't want to be completely unhedged. The deleveraging feature of this product is very effective because the leverage will fall steadily if it remains in the money, allowing clients to maintain a healthy balance between pick-up and risk," says Dickson Law, head of corporate sales for the Asia-Pacific region at BNP Paribas.
In addition to the trend towards deleveraging, BNP Paribas has also sought to cater to a switch from cashflow hedging to liability hedging that has resulted from the two-way volatility in renminbi. Those Chinese corporates that had previously issued dollar bonds to benefit from low funding costs may now incur losses if they had not been hedged against renminbi depreciation, as they have to buy dollars when the bonds mature.
In this context, corporates need to put on liability hedges in a flexible, cost-efficient way, and the bank has structured a dollar/renminbi cancellable call spread, which is essentially an option with an important cost-reduction feature. The buyer of the contract would pay a premium on a periodical basis, but critically has the right to early termination without a penalty charge.
"The cancellable call spread is a very good fit for corporates that did not hedge their dollar liabilities prior to August 2015 and now need to find cost-efficient hedging instruments. The cancellable feature gives them flexibility, so that if the cost of hedging falls in the future or the market moves and they no longer need the protection, the buyer can close out," Wong explains.
Both the deleverage target knock-out forward and the cancellable call spread are unique structures that BNP Paribas has developed to meet the specific challenges facing corporates as a result of recent volatility in renminbi. As such, the bank has set itself aside from competitors in the region by adapting its product offering to the changing needs of corporates.
"We have directly tailored the products to fit the clients' needs in managing the risk of euro/renminbi and dollar/renminbi. Clients will often talk to their sales contacts about the challenges they face, and what is most important is the subsequent discussion between sales and structuring teams that would result in a product that directly meets clients' needs," says Law.
Meanwhile, BNP Paribas has proven itself adept at supporting the needs of high-net-worth individual investors as well as corporates. Pitching the benefits of diversifying long-term investment portfolios without dramatically changing the risk-return profile, the bank structured a three-year principal protected forex-linked certificate with a high coupon to match the high yield on emerging market bonds.
"If they invest in forex, our private bank clients typically trade products with short maturities of six months or one year, but given the market has been fairly range-bound this year, we advocated using this bond alternative investment to take a longer-term strategic view, rather than a tactical short-term view. The forex-linked certificate has been a popular alternative for investors that had been heavily focused on emerging market debt," says Ken Tan, head of forex investor solution sales, wealth management and family offices at BNP Paribas.
Investors seeking long-term strategic plays have also found value in the bank's digital basket certificate, which sought to identify discrete anomalies among highly correlated currency pairs. Using detailed analysis of economic fundamentals and in-house currency forecasts, BNP Paribas focused on the themes of a bearish US dollar against the Indonesian rupiah and Indian rupee, and a bullish US dollar against the Singapore dollar and Taiwan dollar. With a tenor of two years and a maximum coupon at maturity of 16%, the basket certificate has proven popular with investors.
"Currency basket products typically focus on a common macroeconomic theme, such as stronger emerging market currency pairs or a stronger dollar, but with our Asian divergent digital basket certificate, we sought to use the correlation between the underlying currencies to provide a highly leveraged return. The product showcases the high degree of customisation that is possible with forex structured products," says Wong.
This article was first published on Risk.net in September 2017