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Usually, the structure is called Double-No-Touch, in which an underlying asset has to stay within a predetermined range for the product to perform well, yielding a high coupon, for example. Well, as the volatility has fallen to below-average in several asset classes (in particular in stocks and FX) and the skew has largely returned to normal as well, I thought that a product with the reverse payoff would make sense.

6 months ago, I structured a Double-No-Touch for a client with 98% capital guarantee on 3 oil stocks. The structure would pay 98% + 6% if the 3 stocks stayed within the range (98% otherwise). The vol was high and the barriers could be placed at +/- 25% from spot.

Now this product matures within the next days and I thought about replacing it with a Double Touch! Still 98% capital guaranteed, 6 month maturity and with a payoff of 98% + 6% if one out of two stocks does break through a predefined range, 98% otherwise. For that, I need 2 stocks whose options trade with an implied vol below historical vol and where the vol is expected to increase. The stocks need to be relatively correlated, but the correlation should widen in the future. Due to the skew in the equity market, I would place the lower barrier further away from the spot than the upper one. Any idea about which 2 stocks  would fit such a description?

Last week, I was convinced at last that there would be no or little  inflation in the years to come. For those who subscribe to this point of view, the question about income from bond-like holdings arises. How do you re-invest a maturing bond? Short term-rates are a flat-liner, no chance of generating income through short-term money-market instruments; at best, the interest generated is barely sufficient to cover for the bank’s cost. Read the rest of this entry »

Well, the floored floaters have run their course for most of the issuers. As the credit spreads dwindle, these products become less appealing, at least for the first tier issuers.

As the equity volatility has also fallen dramatically, there’s no point in selling it in the form of reverse convertible either. With the main FX  pair volatility also at low levels, I wonder what the best structure would be to invest in. And I remember a structure for which I always had a faible. Shark Notes.

Shark Notes are capital guaranteed products, which have usually a 100% participation to an equity index, an FX pair or a commodity, but feature a barrier that knocks out once a certain performance is reached. That may not sound appealing, but the fact is that these structures, when constructed in the right way, can potentially generate huge profits with very limited risk. Consider a Shark Note in guaranteed EUR  that participates to 100% to the appreciation of the RUB against the EUR or the BRL against the EUR, with a barrier placed at 130% (i.e. the RUB would have to appreciate by 30% before the note knocks out, that would be below the multi-year lows of this FX pair). Not bad? It gets even better. As the embedded options are very cheap, consider putting 2% of your capital at risk (i.e. guaranteeing the product at 98%) and you get a rebate of >10% if a knock-out occurs. So in case the RUB appreciates against the EUR, no matter by how much, you beat the Money-market rate big time, potentially approaching equity returns. All this for 18 months maturity; beats everything in my humble opinion. If anybody issues such a note, be so kind and let me know.

Disclaimers + sales restrictions = trade barriers

On the right side of the homepage of this website is a menu with many issuer links. Each link redirects you to the homepage of an issuer. What do you see first? A DISCLAIMER! And all too often, a choice of countries with the request to select your country of origin. If you ever read all the small-printed stuff (often over 100 lines of text), were you all the wiser? I wasn’t. In fact, I never read it. Given, I’m a product specialist, so I should know. But I am sure that no investor will get any information in the text that will help him or her choose the product that is right for his/her risk profile. Read the rest of this entry »

The ideal portfolio structure

It has ever been difficult to find out how the ideal structure of the portfolio of an investor, be he of private or institutional nature, should look like. Very few investors actually know about the shape of the expected return distribution they really prefer. Many sophisticated questionnaires aim to determine the risk / return profile of the investor. However, these two values are not sufficient to give a complete representation. A risk / return profile typically assumes that with higher risk, an investor may expect a higher return, but also that the losses could be higher. Hence, the classical categorization of investors assumes a normal distribution of returns.

But what if, for example, an investor would like to keep the chance of higher returns while limiting his risk? Such return distributions with classic investments like equities or bonds are extremely rare, and yet investors often ask for it. Advisers are often quite helpless in such situations.

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Hello World!

Seems like an age has passed since these two words were first displayed on the black and white screen of a small cubic computer… Well, this is my first blog! And it’s about structured products, no joke :-). What’s the use for a structured product blog? Share thoughts about them! There’s so much to know and so few people actually really understand the possibilities they offer. So; here’s my first thought about two product types: floored floaters and double currency units.

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