Abbey National Financial Products is about to launch a capital guaranteed FTSE 100 tracker fund that is structured using over-the-counter derivatives. Nigel Cannon, head of equity derivatives marketing in London, said the notes are innovative because they offer 100% participation within what is essentially a capital guaranteed structure, as the FTSE 100 would have to drop by more than 50% in the next five years for investors to lose capital. Traditional capital guaranteed structures do not have that downside feature but usually only offer 70% upside, he noted. "There's a one-for-one downside risk if the market ever falls by more than 50%, but you're talking about the FTSE 100 going below 2,500, and God forbid this market should ever go down that far," he said. The U.K. equity benchmark closed at 5,135 Tuesday.
The structure will use zero-coupon bonds to provide the guarantee. Investors in Abbey National's offering will buy an at-the-money call option on the index and sell a put option with a 50% barrier. The market has to fall by 50% over the next five years for that to kick in, Cannon explained. The options will all be executed on the OTC market because of the maturity, he added, declining to reveal further details. The product is aimed at U.K. retail investors.
