FX;PLN; Corporate hedging gone horribly wrong

The perils of very low volatility,,,,
Polish corporates have cheapened their corporate hedges in a very low volatility environment by selling optionality via structures. (When PLN was trending stronger, back in the leverage days, if anyone remembers them).

On the back of it, they are now basically short gamma, vega, vanna and volga on highly leveraged positions. I dont know what plan B was, but it should have included some form of riskmanagement. Right now though, it seems many of these corporates are caught up in this unpleasant situation with huge losses to follow.

Size of the losses are such, that Economy minister Waldemar Pawlak last week warned of "potential losses in the billions of Euros" and added that those losses were "a threat to the Polish economy".

The financial regulator has mentioned that the losses will be less than 1% of the Polish GDP , but with a Polish GDP of around 350 BN Euros, it is still quite chunky.
Further, talk is that most of these structures have NOT been unwound as of yet and that collateralisation against losses has been rather limited so far.
Hence, chunky margin calls will be rolling in soonish, putting pressure on these corporates to come up with additional capital, bringing the losses further into the spotlight.

The Polish financial regulator is supposed to release the loss estimates by the 15th or 16th of Dec. However, it will be quite difficult to make a correct macroeconomic estimate on this one and the risk is that the number will be too low.

4.00 in Eur/Pln is supposedly a big barrier level which will trigger spot buying from the options market north of it. On top of this, there is a high probability corporates will have to start unwinding long PLN positions on a massive scale before long. This all has the ingredients for a swift move towards 4.20 should we break 4.00. Spot is currently 3.9875, so very close.

This is just the FX impact.
Naturally this will have ramifications for equities, corporate CDS´s and corporate bonds.
It should also speed up the steepening of the Polish yield curve as corporates go down, unemployment increases and domestic demand takes a hit.

Likewise, it does not spell good news for the Euro either. (I am, as any frequent reader will know, not bullish on CEE as a whole, which will be a drag for the Euro)I am still long Eur/Usd and will try to ride it towards 1.36, but I am getting ready to buy Eur Puts and reverse the position.
I am adding to my Eur/Pln long.

As always, good luck.









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