2002 winner | CURRENCY DERIVATIVES HOUSE OF THE YEAR UBS Warburg

Turnover in the over-the-counter currency derivatives market was fairly flat last year, but a few dealers are still attracting corporate and investor business. UBS Warburg wins Risk’s currency derivatives house of the year award for successfully providing its clients with access to sophisticated trading and pricing tools, while nurturing its structured products business.

UBS made its FX Option Trader available to clients in mid-2001. This is essentially the same pricing tool that its own traders use. It added click-and-deal functionality for all vanillas and common strategies in October.

Adam Kreysar, UBS’s London-based managing director and global head of forex options, says: “The client is seeing the same price as our options team. The underlying vol surface is being fed by real-time information, not batch information that is one week, or even one hour, stale.” So whenever a UBS trader transacts, the volatility is updated both for the dealing room and UBS’s clients.

UBS will extend straight-through-processing to exotic path-dependent options such as range binaries, windowed barrier options and combination strategies by the end of this month, Kreysar says.

The bank’s clients appreciate the greater price transparency. “You can price and trade more structures like straddles, risk reversals and calendar spreads than on most other dealers’ systems,” says Micael Johansson, Stockholm-based currency options trader in the treasury of ABB, the Swedish industrial corporate. “Also, it allows you to trade more wing options, whereas with many other dealers you can’t trade purely electronically if the strikes are too far out,” he says.

Other clients agree: “FX Option Trader gives accurate and efficient information about the smile. I can price options for my clients very quickly,” says Solon Saoulis, London-based head of derivatives at American Express Bank. Saoulis uses the tool for hedging and investing on behalf of the bank’s high-net-worth and corporate clients.

The analytics provided via UBS’s FX Web client portal are exhaustive. The system includes trade ideas and strategies and a heat map tool that provides clients with a clear, colour-coded graphical representation of cost of volatility across different currency pairs and maturities as determined by measures such as implied volatility minus actual volatility. Clients can get volatility report alerts and Garch volatility forecasts sent via text message to their mobile phones. This may sound a little gimmicky, but it can be handy. For example, clients trading barrier options may want to take action as soon as spot prices breach the barrier level.

Apart from using e-commerce to entice corporates and investors to trade bilaterally with it, UBS has also made a big push into forex retail structured products. The bank’s FX Investor portal has brought pricing and click-and-deal capabilities directly to private client advisers at UBS Private Banking and other subsidiaries such as Cantrade Bank in Switzerland. And this commoditisation of complex structures has led to explosive growth – a 1,400% year-on-year increase in 2001 in ticket volumes for retail structures.

Most of the growth in retail structured products is accounted for by dual currency deposits (DCDs) – structured products akin to a floating-rate note with an embedded European binary option. Say, for example, an investor wants to invest its capital by depositing £100,000 for one year with a target yield of 10%. FX Investor allows UBS’s client, the investor’s client adviser, to price a DCD with those parameters using the bank’s current volatility surface. So if the investor deposits £100,000 today – at a 1.44 spot dollar exchange rate – in one year it will receive £110,000. However, if rates are above 1.50, it will receive £110,000 in dollars struck at 1.50. Alternatively, the investor could specify an exchange rate sensitivity instead of an interest rate target upfront. In addition to DCDs, range accruals have also proved a hit with retail investors.

The liquidity payout for UBS is clear: “These structures get our books long options. We simply throw them in our books and trade vanilla options against them,” says Kreysar. This creates an additional supply of options that UBS’s speculative clients often purchase, he says.

At the other end of the spectrum from retail products, the bank’s ability to create highly structured bespoke products is impressive. “UBS seems capable of finding a structure to try and meet almost any requirement,” says the controller and treasurer at a European travel company.

The firm’s hedges are nearly always US dollar-related on a principal averaging around $160 million a year. “We look to secure dollars at better than the rate used to cost our brochures, and we would normally look to use derivatives in the summer of one year for equal monthly deliveries in the following year,” he says.

However, at the close of 2000, the firm was not fully covered for 2001: “UBS, in competition with others, was able to come up with solutions, which in hindsight have worked reasonably well for us,” says the treasurer.

“We don’t necessarily always want to use UBS, but it’s great to be able to pose a scenario and get a structure tailor-made very quickly,” he adds. And of course this is the risk – clients could use the bank’s sophisticated analytics and pricing tools then book the trade elsewhere. But the bet is paying-off for UBS.
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