FxWirePro: Fed’s decision next driving force for EUR/USD; hedge with PRBS

When we look at the commentaries from Yellen, and from top notch companies in the US, the dollar's rally during the Q1 of 2015 here a concern and even a pessimistic approach for a lot of US companies were observed, especially the multinational companies doing business overseas.

However, the US economy and dollar is still relatively stronger shape on historical basis. You also have commodities (including gold) falling down, how will that affect necessarily the inflation mandate that could be related to the rate hike.

We continue to see commodities fall down and those have historically been an inflation hedge. So, these are sort of additional dynamics. Companies will have to face during the next couple of quarters of earnings and also it could be a contributor to the decision of just how soon the Fed will increase rates.

Put Ratio Back Spread: EUR/USD

We recommend arresting further downside risks of this pair as the Fed's decision is nearing. This could be done through hedging with Put Ratio back Spread.

Purchase 1M 2 lots of At-The-Money -0.48 delta puts and sell 1M one lot of (1%) In-The-Money put option usually in the ratio of 2:1 or 3:2. Expect the underlying currency (EURUSD) to make a larger move on the downside. 

The short ITM puts funds to the purchase of the greater number of long puts and the position is entered for no cost or a net credit. The delta of combined positions should be around -0.34 with slightly negative theta value. If a disciplined hedger strictly follows all these mathematical computations, then irrespective of market sentiments, one can be rest assured with the riskfree exposures in his foreign trade.

The underlying exchange rate has to make substantial move on the downside for the gains in long puts to overcome the losses in the short puts as the maximum loss is at the long strike. Give it a longer time to expiration so as to make a substantial move on the downside.