Bankgesellschaft Berlin plans to issue structured notes with embedded over-the-counter equity options aimed at German corporates looking to earn an above money market interest-rate and are willing to take on market risk. Karsten Hesser, senior trader in the structured retail and institutional products group in Berlin, said the notes will give investors either an above market interest-rate or upside participation in the Dow Jones EURO STOXX 50.
In the structure the investor is long a one-year at-the-money call on the index, Hesser explained, adding that zero-coupon bonds provide the guarantee. Bankgesellschaft Berlin is also long a six-month European-style call that allows it to cancel the note after six months. The strikes will depend on the participation rate and the level of the EURO STOXX 50 when it launches the product in September. The options will be structured in house.
Investors win if the EURO STOXX 50 rises in the first six months as the bank will call the product and pay the investor 103% of what they put in, giving an annualized return of 6%. Six-month money market rates were 4.35% on Thursday. Investors also win if the note is not called and the EURO STOXX 50 rises in the second six-month period, as they would receive approximately 44% participation in the rise. In the worst case scenario for investors the note will not be called and the index will be down at maturity then investors will receive 100% of their principal, Hesser explained.
Hesser expects the bank will issue these notes in the middle of September and will start marketing the product at the start of that month. It will decide on the size of the issue during the marketing period.
