Currency-linked retail structured products have fallen out of favour with investors in the US, with sales falling 77% at the end of 2014 from an all-time high of $2.4bn in 2008.
This year’s sales of structured products linked to currencies hit their highest point last month with $134m in sales. There have been a total of 46 products linked to currencies in the year to date, adding up to a total sales of $226m for the year, compared with 115 products worth $548m last year. Over the years the trend has been that currency-linked products are becoming less and less popular among investors.
Of the 46 products issued this year linked to currencies, almost half were linked to the USD/EUR exchange rate. Other currencies used as underlyings in the year to date include MXN/USD, MXN/EUR, JPY/USD, INR/EUR and one linked to a BRIC basket.
“In the foreign exchange options space people have been trading the euro, while everyone has been waiting for clarity on the Greek situation,” said Gus Skondras (pictured), managing director, FX options and structured products, INTL FCStone Financial, a New York-based financial services firm. “Volatility has been halved in a very short period of time, resulting in decay; the front-end of the volatility curve has imploded and market makers and customers are selling premium as quickly as possible, resulting in big fluctuations in the market.”
Morgan Stanley has taken advantage of the price moves of the Brazilian real, Russian rouble, Indian rupee, and Chinese renminbi relative to the US dollar, to issue a buffered performance leveraged upside security linked to the performance of a basket of the four currencies relative to the US dollar, featuring a leverage factor of 18.
The three-year note priced on July 10th with an aggregated principal amount of $5m. The payout structure offers at maturity an 18x leveraged rise in the underlying basket, if the basket of currencies has strengthened relative to the US dollar. If the basket has remained unchanged or weakened relative to the US dollar by no more than 30% from its initial level the product repays invested capital. Otherwise if the underlying basket has weakened relative to the US dollar by more than 30% capital erodes 1-to-1 with the fall in the basket, subject to a minimum payment of 30%.
Goldman Sachs has been the most active in issuing currency-linked structured products this year, with 18 issues worth a collective $74m. Thirteen of these have been leveraged currency-linked notes linked to the USD/EUR exchange rate. The average level of leverage for these products has been 276%, with a range of 200% to 430%.
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