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August 2007

Trading strategies: When is a barrier event not a barrier event?

by Lee Oliver and Chloe Hayward

It is not uncommon in any market for an underlying to gravitate towards certain option strikes as they near maturity. In foreign exchange, which is arguably the most sophisticated options market, it is increasingly the barrier component of exotic trades that acts as the magnet. The amount of leverage certain structures can provide results in huge buying and selling of the underlying as participants try to defend or knock out the barrier.


Goldman, Dresdner, the hedge fund and the barrier: The weeklyFiX

It was therefore not a major surprise when spot EUR/SEK moved towards a significant barrier that was known to be in place at 9.1500 on July 5. In a research note sent out the day before, Lehman Brothers advised its clients: "There is a big barrier at 9.15 EUR/SEK that still is defended. Once broken we could head lower quickly and aim for 9.1180."

Market sources say that this particular option was initiated by Drawbridge, part of the US-listed Fortress Investments Group. Drawbridge has declined to comment on what it believes subsequently went on, although it is believed to have threatened legal action. When...


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