Seagull product is a structured product which is done generaly for hedging purposes. Seagull can be an alternative for the Collar product by modifying the band levels to better levels for the hedger. The drawback of seagull is the existance of the cap level for the hedger’s profit potential. There are two band levels like a Collar but also there is a cap level for the profit potential.
For example if a hedger uses Seagull product to buy USD/TRY parity at the expiry date, the hedger will make profit when spot rate at maturity is higher than the upper band level like at the Collar product. The maximum profit that the hedger can make is determined by the difference between the cap level and upper band level. When spot rate at the expiry date is higher than the cap level, hedger can only make profit upto cap level.
Applications:
If the hedger does not want to use leverage and expects that the volatility of the market will not increase so much, Seagull product can be a partial hedge. The band levels will be in favor of the hedger when compared with the Collar product. If the price of the underlying currency makes great move in favor of the product, hedger can not get the advante of the levels above/below the profit cap.
Advantages:
-
If market moves in favor of the Seagull
products way, hedger makes the foreign currency transaction at a better rate
than the spot rate.
-
Hedgers has the advantage to speculate the
market in a price range rather than fixing it.
-
Structure is costless.
Disadvantages:
- If
market moves against the way of the Seagull product hedger will make the
transaction a worse rate than the spot rate.
-
If market moves in favor of the Seagull
product, hedger can get the advantage until the profit cap level.
