Scottish Life International has written equity puts on behalf of its investors to structure a reverse convertible note for a new fund, dubbed Select Income & Growth Bond 3. The puts have a knock-in feature at 70% of the value of the worst performer of either the FTSE 100, the Standard & Poor's 500, or the Dow Jones EURO STOXX 50. Neil Lovatt, director of marketing development at SLI, estimated the fund would be approximately GBP30 million (USD45.58 million), which is also the notional size of the equity puts.
There are two strategies for investors in the fund, an opportunity strategy and cautious one. The opportunity option provides a maximum return of 132% provided that none of the three stock indices fall by more than 30% of their Oct. 28 levels by Nov. 23, 2005. If all three indices have recovered to their initial levels by November and remain at or above those initial levels until December, then the puts end out of the money. Alternatively, if none of the indices fall by 30% the puts do not knock-in, so also end out of the money. If the indices do not meet either of these conditions, investors receive a reduced capital return.
The cautious strategy has a maximum return of 125.5% provided that none of the three stock markets fall by more than 30% from Oct. 28 to Nov. 23, 2005. The same return applies if all three have recovered to 85% of their initial levels by November 2005 and remain at or above that level until December. This option's strike is 85% of the initial level of the indices.
BNP Paribas is the counterparty on the reverse convertible structure. Lovatt said it offered the best terms.