Ane Lottering

Ané Lottering

Ané Lottering

Forex Options Trader

Derivatives Demystified - Participation Forward

Hello and welcome to this week's installment of "Derivatives Demystified."

I owe my readers a post on volatility trading and vega. Happy to report that it is still on its way; my recent travels to Cape Town have just moved it out by a week.

I spent a few days last week in the Mother City and had the best weather, I think, in the recorded July history of the city.

I had dinner at Granger Bay between Seapoint and The Waterfront, and it is here I contemplated how best to make use of the beautiful wind-free sunny weather. Finally, I decided to set to the seas, but first, I needed to identify the best vessel to carry me into the Bay. A paddle board is a simple no. And a Catamaran trip is a waste when you have only a few Instagram followers. So what I saw next was the vessel for me: a neon-green CY-plated stallion-stickered jet ski. You have to understand that for those of us who grew up on the upper east side of Carnival City, making waves on a jet ski is a dream come true. It's both the thrill of chasing seabirds up and down and splashing cool water at the joggers on the pier that I think must be unparalleled. I decided to import my pink camo version from Texas for USD7,000.

SARS should complete my Tax Return Audit in 21 business days, and then I can click to buy.

At the current USDZAR exchange rate of 16.48, my jet ski will cost me ZAR115,360*. I want to hedge to protect against USDZAR trading back to above 17.00, but I do not want to pay any upfront premium.

I can buy an outright 1m USDZAR forward at 16.5445**. But then I can't participate if USDZAR trades even lower than 16.48.

*7,000 x 16.48
**16.48 + 1m forward points 645

A terrific solution - a participation forward!


I sell a 16.77 strike USD put option in USD3,500 (50% of my USD payment)
I buy a 16.77 strike USD call option in USD7,000 for zero premium.

Outcome 1: If USDZAR trades below 16.77 at the end of one month, I buy USD3,500 at 16.77, and I am free to buy the other USD3,500 at the market at a better rate (participation)

Outcome 2: If USDZAR trades above 16.77 at the end of one month, I buy USD7,000 at 16.77, which means I have been hedged and can execute at a better rate than in the market.

Thank you for reading, and hoping to make waves in your portfolio or on a body of water near you!