Equity derivative marketers in Japan believe in the coming weeks there will be a surge in demand for structured notes embedded with barrier options linked to the performance of the Nikkei 225. The value of transactions could swell to JPY20-30 billion (USD149-224 million) as Japanese retail clients rush to pick up yield before the fiscal year closes at the end of March. "This will likely accelerate in the next couple of weeks," said an equity derivatives marketer in Tokyo. There is currently about JPY37.5 billion of Nikkei-linked notes in the market, of which many were structured in October after the Nikkei bounced back from September lows around the 9,600 level. The index climbed to 11,000 by November.
In a typical structure referenced to the Nikkei 225 at 9,500, an investor sells a knock-in put, with a strike at 9,500 and a barrier at 70% of spot or 6,600, and buys an out-of-the-money knock-in call. Tomi Matsu, associate director of the structured products group at UBS Warburg in Tokyo, said the premium the investor receives for selling the put is 5.1%, minus the 0.04% cost of the call and fees, equals an annualized 7% coupon.
"We're also seeing an increase in this but also an increase in corporates selling calls before year-end," said a marketer at Nomura Securities in Tokyo. Companies are looking to generate premium by selling calls on their cross-shareholdings as well as obtain yield via the equity-linked notes, he added.
