Dresdner Kleinwort Wasserstein and KBC Derivatives are attempting to lure investors back to the Italian reverse convertible market by structuring products with lower risk profiles. Alfredo Paramico, head of equity derivatives for Dresdner Kleinwort Wasserstein in Milan, said convertible volumes have fallen to between 5%-10% of last year's levels because investors lost about 70% of their principal investments. As a result structurers are attempting to come up with defensive products which still offer reverse convertible like returns, he noted.
KBC Derivatives in Milan is looking at making the first use of non-sequential Parisian equity options to structure knock-in reverse convertibles, according toMaurizio Morini, country manager. A Parisian option is only triggered if the underlying trades above or below a predetermined barrier for a certain number of days.
KBC is looking for the right underlying to structure the reverse convertibles, Morini said, adding that he anticipates the new product will hit the market by the end of July. It is likely to be a six-month reverse convertible where the share will have to trade below the knock-in level for 10 non-sequential days in order for the put to knock-in, rather than one day, which is the normal structure. Morini said KBC derivatives got the idea for Parisian options from the foreign exchange derivatives markets where these options are traded regularly.
DrKW's Paramico said he had not seen Parisian options on equity derivatives before, but doubts a reverse convertible structured with these instruments would be popular because the coupon would be lower than a traditional convert with a one-touch option. DrKW is working on a principal protected reverse convertible that would be structured with a zero-coupon bond and a put spread on the underlying. This could offer a coupon of 10% on a three to four year note.
