Congress digest

Banks fear IAS 39 impact on options

With the final amendments to International Accounting Standard 39 due out this week, bank officials speaking at FX Week’s Congress warned that accounting standards may push corporates to use vanilla products.

"There are many accounting tensions and debates around IAS 39," said Ben Keeping, a vice-president at Deutsche Bank in London. "If an embedded derivative contains FX optionality, there is a good chance you are going to have to separate time and intrinsic value. This causes problems because most are off-balance sheet."

Hedge accounting can mitigate some of the P&L issues, but different countries have varying opinions, depending on what their auditors accept, he added.

However, where accounting standards can be met, demand for options may not necessarily be reduced, said Lutfey Siddiqi, global head of FX structuring at Barclays Capital in London.

Corporates may be wary of options due to accounting rules, but they are "fed up with being afraid of options", he told delegates. "Either they didn’t hedge or used forwards, and as so have been burnt by trend moves," he said. This has led to an appetite for options that meet accounting requirements or options with a minimal impact on accounts.

Combining programmes is the road to smooth overlay

A currency overlay programme derived from combining trend-following and option-selling produces a smooth portfolio with good returns, according to Jessica James, vice-president within FX risk advisory at Citigroup in London. This is due to their negative correlation. Crucially, knowing when to switch between the two trends at certain triggers produced the best results, she told delegates at the FX Week Congress.

Currency pairs best suited to a trend-following programme include dollar/yen or euro/yen -- "those with very separate economies," said James, while pairs with tightly linked currencies, for example, dollar/Canada, are not.

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