One particular zero-coupon option trade has done much to spur client activity – and Deutsche Bank was one of the banks involved. During the first six months of 2010, Toronto-based insurer Fairfax Financial purchased deflation protection worth $21.539 billion in notional, paying $173.7 million in premium, according to the firm’s second-quarter financial statements. The 10-year zero-coupon 0% options were denominated in dollars, euros and sterling, and were executed by Deutsche Bank and Citi.
The other side of the trade was largely taken by California-based fixed-income manager Pimco, which reported it had sold more than $8 billion of 10-year zero-coupon 0% inflation floors in a filing dated August 27. The floors were sold in return for more than $70 million in premium, with Deutsche and Citi again involved as counterparties.
The transaction made perfect sense for both participants, says Daragh McDevitt, London-based global head of inflation-linked structuring at Deutsche Bank. For Fairfax, the 0% floors act as a hedge against deflation and the impact that would have on its equity portfolio. At the same time, Pimco was able to cash in on 0% inflation floors embedded in its sizable portfolio of Treasury inflation-protected securities (Tips).
Read more: http://www.risk.net/risk-magazine/feature/1934011/inflation-derivatives-house-deutsche-bank#ixzz1BjVpe8mk
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