National Savings and Investments, the government-backed savings provider in the U.K., discovered last Wednesday it was launching its most valuable investment product yet, due to the sudden market downturn. The product, which offers investors 100% capital protection and 110% participation in the upside of the FTSE 100 index, was hedged with counterparties before the sharp rise in volatility, explained Alister Rayner, fund manager of the global equity bond in London. This means the option embedded in the product is more valuable than when the product was priced and the fall in markets means investors will also gain from entering the FTSE at lower levels. "It's our best offer yet," said Rayner. This situation in which a distributor is set to issue a product as volatility rises has arisen before, said one product structurer. The distributor often decides to sell the product at a profit back to the bank, he added. Rayner said National Savings would not do this.
Volatility, as measured on the Chicago Board Options Exchange volatility index, rose to 20% at the start of last week, up from 14.5% at the beginning of the month. Falling markets triggered the rise in volatility, as the Madrid bomb attack coupled with renewed concern about the Middle East affected investors' confidence in the equity markets, explained traders.
