Forwards, not options can provide edges on desks. It's clearly not exchange traded. This is a decent trade with risk reward in mind, but who's going to trade it without definitive hedges. Puts are expensive, forwards provide many more scalable edges in making this trade. Bilateral contracts don't have to be at current market prices, nor does there have to be a winner and loser. Both parties have the ability to trade this without any loss or risk.
Actually, pretty much all contracts HAVE to be at current mkt prices, whether bilateral or otherwise. An off-mkt transaction such as you describe would likely be classified as "market abuse" by any regulator, so nobody would do it, unless compliance specifically signs off on it. And no, simple bilateral contracts like FX fwds cannot possibly work "without any loss or risk" for both counterparties. So I have to agree with @Sig here...
Bit off-topic, but what do you think trading desks at Latvian and small Russian banks do?! Sometimes being BVI or Cyprus based means you have an enormous edge in the market. I used to think that some regulators are just lazy, understaffed and incompetent, but now I suspect it's nefarious behaviour, e.g. Cyprus ... has a weak record of going after fraudsters - Moneyval's last Cyprus review, in 2011, said it had convicted just two people and issued only nine orders to freeze accounts since 2005. Cyprus is a financial centre that hosts more than 14,000 offshore firms, at least 12,000 of which have no physical presence on the island.
It's not 1:6. For NZD to go back half-way from 0.68 to 0.74 we would have to force Fed speakers to retract their comments about Dec hike, modify Sep projections, forget Yellen telling to look through inflation weakness and delete this week's US CPI report. For another half we'd have to find evidence that there was Russian interference and re-run election Venezuela style that puts National back in charge. Since 0.68->0.74 is 600 pips, this means that OP has some inside knowledge that Winston Peters wants to mandate RBNZ to defend the 0.67 floor. This is the only plausible explanation why a g10 currency cannot fall more than 1.5%. I also wonder why it should return to 0.74. At 0.74 RBNZ were talking the currency down as overvalued. At 0.68 they are happy. It's a long period from elections through policy formulation and policy implementation to inflation impact, so it will be a while before we learn how looser fiscal policy and more infrastructure spending specifically exacerbate the builders supply-side constraints and push up domestic prices. For now we will be in limbo on NZD side for more than a month until GDP print, next RBNZ meeting or inflation print, so USD and AUD developments are about as important. My opinion is that markets craved for inflation. New gov is more likely to deliver inflation and require hikes than cause a slowdown and require cuts/postpone hikes, so why sell NZD*? *- other than NZD being overvalued at 0.74 NZD is discussed in posts #1, #4 and #5 out of 15 posts, so I am not sure NZD is the actual topic here. Can I buy indulgence for being offtopic by posting an NZD comment?
To be sure, I am not suggesting that, if a bankster wants to get creative, they won't be able to come up with a way to cook up a magical trade that is off-mkt, risk-free and benefits all parties. As the most awesome example of this, I highly recommend you read this: https://www.bloomberg.com/news/features/2017-01-19/how-deutsche-bank-made-367-million-disappear It's an incredible story, especially since I know some of the people involved personally. At any rate, my point was that you cannot do things of that nature with a simple fx fwd trade, where the mkt is very liquid and transparent.
I agree. Also, it's very important to appreciate just how special New Zealand actually is, as far RBNZ is concerned. Firstly, let's not forget that NZ created the inflation-targeting central bank model, which is now nearly universal across the developed world. Secondly, unlike in other countries, it's relatively easy for the governing party to push changes to laws that determine the CB's mandate through the Kiwi parliament (that's, incidentally, how they ended up inventing the first modern CB). All this means that most of the woes and risks that have brought down Kiwi are political in nature. It's hard to imagine that things will change soon.
Now someone gets it. It isn't simply funds involved, banks own the regulators. By the way....forwards weren't my speciality, clearly. But, I do trade currently and before on Tradeweb and other pools. I know a few still on currency desks, save for the fact I don't trade that at all. I do know for a fact they do that, and you won't ever read that on Bloomberg or FT.
Ditzy New Zealand Prime Minister has big bowl of stupid for breakfast. http://www.bbc.com/news/world-asia-42048479