deals
®Coming to Asia's aid
®Euro praise
Commercial gain
Complex formula
What'sNewS Issueó-June 1998 Q
During the recent Asian currency crisis, quite a few banks terminated deals with Asian counterparts, and took
large losses in the process. During the same period, Rabobank was able to help a major global power company
replace a long-dated currency hedge on a few hundred million US dollars against another G10 currency. The
solution was a long-dated currency swap that was packaged together with a long-dated currency option
incorporating special features to reduce both the tenor and magnitude of the total credit exposure.
basis. Determining the credit risk was a
special technical challenge, explains Carl
Walsh, managing director, head of
portfolio management for the Investment
Bank in Asia. The customers' overall
credit worthiness was rated by Moody's,
but the magnitude of the exposure in the
case of derivatives such as this depends on
the replacement value of the transaction.
This can be positive or negative,
and from London Michael Ice (seated),
Christine Hogg (left)
and Mark Gheerbrandt (right)
Coming up with solutions, from Singapore
above and standing, left to right),
Leo Boon Yong, Cari Walsh and Sreenivasan
tyer, seated (left to right), Harrison Kim,
Lee Mon Sun and Jayne Yu.
commercial success for Rabobank,
delivering a gain, in terms of credit
spread, that represented an excess return
relative to market benchmarks; in
exchange, however, we sold our cliënt an
implied credit option. A hedging
transaction currently under review, and
the position will be reviewed on a daily
According to Harrison
HK Kim, managing
director and head of
derivative structuring (Asia-
Pacific), 'the transaction
represented just as much an
interna I success as one
relative to the markets. Not
only was there cooperation
(among London, Utrecht and
Singapore, but there was
also a good deal of team
effort involving the
Singapore and Hong Kong
offices of Rabobank International within
Asia.' What's more, he adds, we executed
this trade in South Korea at a time when
it was well-known that the country was
experiencing its worst economie crisis in
fifty odd years. As a result, 'Rabobank
will enhance its reputation for good will
as well as responsible international
citizenship,' notes Kim.
In addition to addressing our client's
special needs, the transaction was a real
The quickening pace of the transition to the euro, combined with the consequent disappearance of our
guilder trading activities in less than a year, pose a key strategie challenge. Trading in the euro is one of the
few commodity product areas in which we must carve out a strong role; indeed, our ambition is to become
one of the top ten euro houses in the world.
In this connection, Euro Week, a trend
setting publication read by all major
players in the European capital markets,
recently published an article on the
developments towards a common capital
market across the participating countries.
The article identified Rabobank
International as one of the top 20 lead
managers of bond issues in the 11
currencies that will eventually forrn the
(euro. In their Euroland league table we
currently rank number 18, which provides
us with an excellent starting point
towards our top ten target in the Euro.
In the first four months of 1998,
Euro Week explains, Rabobank
International arranged a total of nine
issues valued at over EU 1.94 billion.
Among the clients for whom the issues
were arranged were DePfa Bank, the Bank
Nederlandse Gemeenten, Rabobank
Nederland and a cluster of German states
including State of Berlin, Free Hansa City
of Bremen, Free Hansa City of Hamburg
and the State of Mecklenburg-Western
Pomerania. These deals were realized, in
part, because of the close cooperation
between the New Issues teams in
Frankfurt, London and Utrecht, all within
the division fixed inconte and derivatives
that operates under the umbrella of
investment banking.
depending cm how the market moves.
Clearly, under present Asian
circumstances, a willingness and ability to
bring sophisticated tools to bear in an
effort to measure this volatility are
important to those who wish to continue
doing business.
The Investment Bank in Asia mobilized
advanced analytic pricing models and
Monte Carlo simulations to rnake usable
predictions based on current market data
and the volatility implied by option
prices. Using a complex formula, similar
predictions were made regarding the
estimated level of credit exposure on each
semi-annual payment date. We measured
our peak future credit exposure to within
a 95 percent confidence interval and
found that the exposure was reasonable,
while the downside risk was deemed to be
sufficiently remote or otherwise subject to
trading control. In order to complete the
deal, team members from London,
Utrecht, Hong Kong and Singapore co-
operated on many levels.
