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Deutsche Bank AG/London
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March 2018
Saudi Arabia
Macroeconomic fluctuations often account for most of the risks associated
with exposures to instruments that promise
to pay fixed or variable interest rates. For an investor who is long fixed-
rate instruments (thus receiving these cash
flows), increases in interest rates naturally lift the discount factors
applied to the expected cash flows and thus
cause a loss. The longer the maturity of a certain cash flow and the higher
the move in the discount factor, the
higher will be the loss. Upside surprises in inflation, fiscal funding
needs, and FX depreciation rates are among the
most common adverse macroeconomic shocks to receivers. But counterparty
exposure, issuer creditworthiness, client
segmentation, regulation (including changes in assets holding limits for
different types of investors), changes in tax
policies, currency convertibility (which may constrain currency conversion,
repatriation of profits and/or liquidation of
positions), and settlement issues related to local clearing houses are also
important risk factors. The sensitivity of fixedincome
instruments to macroeconomic shocks may be mitigated by indexing the
contracted cash flows to inflation, to
FX depreciation, or to specified interest rates — these are common in
emerging markets. The index fixings may — by
construction — lag or mis-measure the actual move in the underlying
variables they are intended to track. The choice of
the proper fixing (or metric) is particularly important in swaps markets,
where floating coupon rates (i.e., coupons indexed
to a typically short-dated interest rate reference index) are exchanged for
fixed coupons. Funding in a currency that differs
from the currency in which coupons are denominated carries FX risk. Options
on swaps (swaptions) the risks typical to
options in addition to the risks related to rates movements.
Derivative transactions involve numerous risks including market,
counterparty default and illiquidity risk. The
appropriateness of these products for use by investors depends on the
investors' own circumstances, including their
tax position, their regulatory environment and the nature of their other
assets and liabilities; as such, investors should
take expert legal and financial advice before entering into any transaction
similar to or inspired by the contents of this
publication. The risk of loss in futures trading and options, foreign or
domestic, can be substantial. As a result of the
high degree of leverage obtainable in futures and options trading, losses
may be incurred that are greater than the
amount of funds initially deposited — up to theoretically unlimited losses.
Trading in options involves risk and is not
suitable for all investors. Prior to buying or selling an option, investors
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must review the "Characteristics and Risks of
Standardized Options", at http://www.optionsclearing.com/about/publications/-
character-risks.jsp. If you are unable to
access the website, please contact your Deutsche Bank representative for a
copy of this important document.
Participants in foreign exchange transactions may incur risks arising from
several factors, including: (i) exchange rates can
be volatile and are subject to large fluctuations; (ii) the value of
currencies may be affected by numerous market factors,
including world and national economic, political and regulatory events,
events in equity and debt markets and changes in
interest rates; and (iii) currencies may be subject to devaluation or
government-imposed exchange controls, which could
affect the value of the currency. Investors in securities such as ADRs,
whose values are affected by the currency of an
underlying security, effectively assume currency risk.
Deutsche Bank is not acting as a financial adviser, consultant or fiduciary
to you or any of your agents with respect to
any information provided in this report. Deutsche Bank does not provide
investment, legal, tax or accounting advice, and
is not acting as an impartial adviser. Information contained herein is being
provided on the basis that the recipient will
make an independent assessment of the merits of any investment decision, and
is not meant for retirement accounts or
for any specific person or account type. The information we provide is
directed only to persons we believe to be financially
sophisticated, who are capable of evaluating investment risks independently,
both in general and with regard to particular
transactions and investment strategies, and who understand that Deutsche
Bank has financial interests in the offering of
its products and services. If this is not the case, or if you or your agent
are an IRA or other retail investor receiving this
directly from us, we ask that you inform us immediately.