RAMMSTEIN STEEL
HEDGING STRATEGIES FOR
EXPORTING TO THE UK
Adam Ferguson, Andreas Hjelde & Mike Monaghan
Recommendation and summary
Recommendation:
Rammstein Steel should buy a synthetic long put to
hedge the market view of down and highly volatile.

Summary:
Rammstein Steel has entered a long forward contract
with Rolls-Royce 29 September 2008 with delivery
of high grade steel. Rammstein Steel will receive
GBP 100 mill 17 December 2008.

Contents








Company background
Project definition
Value at Risk
Market data
Forecasts
Market outlook
Map of alternatives
Hedging positions
Company background




Rammstein Steel is a successful steel producer
specializing in steel manufacturing for the auto
industry.
The company has recently entered an agreement
with Rolls-Royce in the UK.
29 September 2008 Rammstein Steel agreed with
Rolls-Royce to receive a payment 17 December
2009.
The amount is GBP 100 mill.
Project definition






Our current exposure is a long forward worth GBP 100
mill in revenues which is due 17 December 2008. (+F)
Future 17 December is 1.8132 USD/GBP
$ Underlying exposure is $181,320,000.
Treasury department wants to reduce down side loss on
revenue.
Treasury department requires a maximum loss of 5%
with a 5% probability (1.645 std dev).
The risk limit is $9,066,000.
VaR for December
Today
9/29/08
Future price:
1.8132
Risk limit
-9,066,000
# Contracts
Exposure: 1600
underlying: 62,500
# SD VaR: 1.65
Maturity date: 12/17/2008
79 days period
Monthly estimate
Riskmetrics inferred
Lower
Price
1.7089
1.6550
Loss on
position
-5,774,522
Upper
price
1.9270
1.9993
Gain on
position
6,301,581
10,669,752
Monthly volatility: 3.55
Annual volatility: 12.63
$ Underlying:
181,320,000
Adjustment -683
Keep: 917
Funding rate: 2%
Risk premium: 1.5%
V@R Center and Confidence Interval
50%
40%
-9,066,000
30%
20%
10%
0%
1.30
1.6495
1.40
1.50
1.60
1.70
1.8171
1.80
2.0018
1.90
2.00
2.10
2.20
2.30
Market data
Dec Options
Strike
Premium
FV Premium
Call ATM
181
4.2
4.23
Call OTM
185
2.85
2.87
Put ATM
181
3.88
3.91
Put OTM
177
2.31
2.33
Futures price: maturity 17
December 2008
1.8132
USD/GBP: Recent history and forecast
USD/GBP ratio
Source: Forecasts.org
Forecast II

Interest rate parity suggests further depreciation of
the GBP to the USD
USD/GBP forward calculated
7
6
1.8200
5
1.8000
4
1.7800
3
2
1
US interest rates
UK interest rates
1.7600
1.7400
1.7200
0
1.7000
Source: Prof. Bodurtha’s Financial Services
USD/GBP forward
calculated
Forecast III
BP Dec 2008 (BPZ8) Futures Prices, Implied Vols, 30-Day Historical Vols, 12/20/2008 Market-Based
(RP) Forecasts and Riskmetric Monthly Vol (12.63% annualized) Likely Range , a/o 9/29/2008
2.10
2.05
2.00
Futures Price = 1.8132, RP = 1.5%, R = 2.0%, &
Forecast = 1.8193
Riskmetrics CP+ = 1.9251, 111 day Max =
2.0814 & Min = 1.8388
Riskmetrics CP- = 1.7078, 111 Day Max =
1.8955 & Min = 1.6594
16.0
Historical 14.69
12.0
CP+=1.9251
F=1.8132
Expect ed Market
= 1.8193
1.75
CP-=1.7078
1.70
1.65
14.0
Implied = 11.67
1.95
P
1.90
r
i
1.85
c
e
1.80
Expected Vol
= 13.02
L
i
k
e
l
y
R
a
n
g
e
V
o
10.0 l
a
t
8.0
i
l
6.0 i
t
4.0 y
2.0
0.0
Market outlook and trends
Economy
 The UK economy is suffering from the recession so the Bank
of England has decreased and will continue to decrease the interest
rate
 There is uncertainty about the world economy due to sub
prime mortgage woes and the rising current account
deficit. As a consequence, Rammstein Steel expects high volatility on
the GBP.
Recent signs of pound weakness
 GBP near record low compared to US dollar.
 British Pound has dropped well below $1.85 barrier.
 Bank of England reluctant to raise rates despite mild inflationary.
fears.
Rammstein’s view
Direction
Down
Certainty
Unsure, ie high volatility
Rammstein’ view is in accordance with
market consensus
Source: Yahoo Finance
Map of alternatives
Level of confidence
Market view | Vol. view
Low
Stable
High
Up
X
X
X
Neutral
X
Alternative II: Synthetic
short straddle
Alternative III: Long
straddle
Down
X
Alternative I: Forward
hedge
Recommended
position: Synthetic long
put itm
Hedging strategies: Current position
L or S (Long/Short)
L
F, C, or P (Forward, Call, Put)
F
Forward/Strike Price
1.8132
Price (C or P), 0.0 (F) - FV
0.00
Number of Contracts
1600
Prices at
Maturity
Step size
0.055
Input futures price
Strike F9
to update
@ Critical
Prices
Long Forward Position
Calculate
d Profit
of a
Long
Forward
Position
1.4832
1.5382
1.5932
1.6482
1.7032
1.7582
600.0000
400.0000
200.0000
-528.0000
-440.0000
-352.0000
-264.0000
-176.0000
-88.0000
0.0000
88.0000
176.0000
264.0000
352.0000
440.0000
528.0000
Total
-33,000,000.00
-27,500,000.00
-22,000,000.00
-16,500,000.00
-11,000,000.00
-5,500,000.00
0.00
5,500,000.00
11,000,000.00
16,500,000.00
22,000,000.00
27,500,000.00
33,000,000.00
1.6495 -261.9912
2.0018 301.7090
-16,374,450.22
18,856,809.40
1.8132
1.8682
1.9232
1.9782
2.0332
2.0882
2.1432
0.0000
-200.0000
-400.0000
-600.0000
1.4832 1.5932 1.7032 1.8132 1.9232 2.0332 2.1432
Price at Contract Maturity
Recommended position: Synthetic long
put itm
L or S
(Long/Short)
L
S
L
F, C, or P
F
F
P
Forward/Strik
e Price
1.8132
1.8132
1.8132
Price (C or P),
0.0 (F) - FV
0.0000
0.0287
0.0391
Combined +1600F-1600F+3700P
Position
1200.0000
1000.0000
800.0000
600.0000
400.0000
Number of
Contracts
1600
1600
200.0000
3700
0.0000
Calculated
Profit of a
-200.0000
Combined
+1600F1600F+3700
P Position
Prices at
Maturity
Step size
0.055
Input
-400.0000
-600.0000
+1600F
-1600F
+1600F1600F+370
+3700P
0P
1.4832 -528.0000
528.0000
1076.3300
1076.3300
67,270,625.0
1.5382 -440.0000
440.0000
872.8300
872.8300
54,551,875.0
1.5932 -352.0000
352.0000
669.3300
669.3300
41,833,125.0
1.6482 -264.0000
264.0000
465.8300
465.8300
29,114,375.0
1.7032 -176.0000
176.0000
262.3300
262.3300
16,395,625.0
-88.0000
88.0000
58.8300
58.8300
3,676,875.0
1.7582
Profit
1.813
2
0.0000
0.0000
-144.6700
-144.6700
-9,041,875.0
1.8682
88.0000
-88.0000
-144.6700
-144.6700
-9,041,875.0
1.9232 176.0000
-176.0000
-144.6700
-144.6700
-9,041,875.0
1.9782 264.0000
-264.0000
-144.6700
-144.6700
-9,041,875.0
2.0332 352.0000
-352.0000
-144.6700
-144.6700
-9,041,875.0
2.0882 440.0000
-440.0000
-144.6700
-144.6700
-9,041,875.0
2.1432 528.0000
-528.0000
-144.6700
-144.6700
-9,041,875.0
@ Critical 1.6550 -253.0697
Prices 1.9993 297.8371
253.0697
440.5538
440.5538
27,534,611
-297.8371
-144.6700
-144.6700
-9,041,875
Futures=>
Price
-800.0000
1
2
2
2
2
2
2
Price at Contract Maturity
+1600F
-1600F
Will gain on an estimated depreciation of
the GBP, but will lose within risk limit on an
appreciation
Alternative I: Forward hegde
L or S
(Long/Short)
F, C, or P
(Forward,
Call, Put)
Forward/Stri
ke Price
Price (C or
P), 0.0 (F) FV
L
S
F
F
1.8132
1.8100
Combined +1600F-698F Position
600.0
400.0
0.00
0.0000
1600
698
200.0
Number of
Contracts
Calculate
d Profit
of a
0.0
Combine
d +1600F698F
Position
+1600F
Prices at
Maturity
Step size
0.055
-200.0
-698F
+1600F698F
Profit
1.4832-528.0000 228.1064 -299.8936 18,743,350.0
1.5382-440.0000 189.7164 -250.2836 15,642,725.0
1.5932-352.0000 151.3264 -200.6736 12,542,100.0
1.6482-264.0000 112.9364 -151.0636 -9,441,475.0
1.7032-176.0000 74.5464 -101.4536 -6,340,850.0
Input
1.7582 -88.0000
1.813
2
Futures=>
Price
36.1564
-51.8436 -3,240,225.0
0.0000
-2.2336
-2.2336
1.8682 88.0000
-40.6236
47.3764 2,961,025.0
1.9232 176.0000 -79.0136
96.9864 6,061,650.0
-600.0
1.483 1.593 1.703 1.813 1.923 2.033 2.143
Price at Contract Maturity
-139,600.0
1.9782 264.0000 -117.4036 146.5964 9,162,275.0
Strike F9
to update
-400.0
2.0332 352.0000 -155.7936 196.2064 12,262,900.0
2.0882 440.0000 -194.1836 245.8164 15,363,525.0
2.1432 528.0000 -232.5736 295.4264 18,464,150.0
@ Critical 1.6550-253.0697 108.1681 -144.9017 -9,056,354
Prices 1.9993 297.8371 -132.1650 165.6721 10,354,505
Will still lose on an estimated
downside, but gain on an upside.
Alternative II: Synthetic short straddle
L or S
(Long/Sh
ort)
F, C, or P
(Forward,
Call, Put)
Forward/
Strike
Price
Price (C
or P), 0.0
(F) - FV
Number
of
Contract
s
L
S
F
C
1.8132
1.8100
0.0000
0.0423
Combined +1600F-3000C
Position
600.0000
400.0000
200.0000
0.0000
1600
3200
-200.0000
Calculated
Profit of a
Combined
+1600F3200C
Position
Prices at
Maturity
Step size
0.055
@ Critical
Prices
-600.0000
+1600F
-3200C
+1600F3200C
Profit
1.4832
1.5382
1.5932
1.6482
1.7032
1.7582
-528.0000
-440.0000
-352.0000
-264.0000
-176.0000
-88.0000
135.3600
135.3600
135.3600
135.3600
135.3600
135.3600
-392.6400
-304.6400
-216.6400
-128.6400
-40.6400
47.3600
-24,540,000
-19,040,000
-13,540,000
-8,040,000
-2,540,000
2,960,000
1.9232
1.9782
2.0332
2.0882
2.1432
0.0000
88.0000
176.0000
264.0000
352.0000
440.0000
528.0000
125.1200
-50.8800
-226.8800
-402.8800
-578.8800
-754.8800
-930.8800
125.1200
37.1200
-50.8800
-138.8800
-226.8800
-314.8800
-402.8800
7,820,000
2,320,000
-3,180,000
-8,680,000
-14,180,000
-19,680,000
-25,180,000
1.6550 -253.0697
1.9993 297.8371
135.3600
-470.5543
-117.7097
-172.7171
-7,356,859
-10,794,821
Input
Futures=> 1.8132
Price
1.8682
Strike F9
to update
-400.0000
-800.0000
-1000.0000
1
2
2
2
2
2
2
Price at Contract Maturity
Will not gain on high volatility,
which is expected
Alternative III: Long straddle
L or S
(Long/Short)
F, C, or P
(Forward,
Call, Put)
Forward/Stri
ke Price
Price (C or
P), 0.0 (F) FV
L
L
F
P
1.8132
1.8100
0.0000
0.0391
Combined +1600F+3200P
Position
1000.0000
800.0000
600.0000
Number of
Contracts
1600
3200
400.0000
Calculated
Profit of a
Combined
+1600F+3200P
Position
Prices at
Maturity
Step size
0.055
Input
1.4832
1.5382
1.5932
1.6482
1.7032
1.7582
1.813
2
Futures=>
200.0000
0.0000
+1600F
+3200P
+1600F+
3200P
Profit
-528.0000
-440.0000
-352.0000
-264.0000
-176.0000
-88.0000
920.5945
744.5945
568.5945
392.5945
216.5945
40.5945
392.5945
304.5945
216.5945
128.5945
40.5945
-47.4055
24,537,157
19,037,157
13,537,157
8,037,157
2,537,157
-2,962,843
Price
1.8682
1.9232
1.9782
0.0000
88.0000
176.0000
264.0000
-125.1655
-125.1655
-125.1655
-125.1655
-125.1655
-37.1655
50.8345
138.8345
-7,822,843
-2,322,843
3,177,157
8,677,157
Strike F9
to update
2.0332
352.0000
-125.1655
226.8345
14,177,157
2.0882
2.1432
440.0000
528.0000
-125.1655
-125.1655
314.8345
402.8345
19,677,157
25,177,157
-253.0697
370.7340
117.6643
7,354,016
297.8371
-125.1655
172.6716
10,791,978
18,145,994
1.655
0
1.999
Prices
3
Sum
@ Critical
-200.0000
-400.0000
-600.0000
-800.0000
1
2
2
2
2
2
2
Price at Contract Maturity
Will gain on changes in the price
either direction, but we will gain
more with a synthetic long put
Recommendation and analysis

Consistent with a market view that expects a
depreciation of the British Pound and a highly
volatile market; we recommend Rammstein Steel
constructs a synthetic long put. It has a maximum
downside risk of % 9.04 mill. That is within our loss
limit.
Rammstein Steel Advisory Team