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Deutsche Bank is recommending receiving sterling 2s4s7s butterflies, either outright or against U.S. dollar butterflies, in order to hedge against a more dovish than expected Bank of England inflation report, due to come out next week.
The firm suggests being long GBP 2s4s7s 50/50, which is optimal from a carry perspective. For investors willing to add more convexity to the trade, Deutsche Bank recommends implementing the butterfly conditionally using three-month receivers. Another alternative is to receive the GBP 2s4s7s butterfly versus paying the USD 2s4s7s butterfly, in order to remove directional risk and position for a convergence of monetary policy...