KBC Asset Management is buying call options and put spreads on a basket of financial stocks to structure a guaranteed fund. Lode Roose, product development manager in Brussels, said the fund gives investors 110% participation in the upside of a basket of 20 financial stocks with a 90% capital guarantee. The investor wins if the basket of stocks increases in value. Roose said the asset manager started buying the options at the beginning of April when it began marketing the fund and will continue adding to the position until May as more investors come forward. The asset manager has been buying options in typical notional sizes of EUR10-15 million (USD9-13.6 million).
In a typical transaction, KBC Asset Management buys a put struck at 90% of the value of the basket and sells a put struck at 100% to structure the guarantee. The 110% participation in the upside of the basket is provided by a plain-vanilla call option. Both options mature in nine years, which is also the maturity of the fund. Implied volatility on the options was approximately 27% last week. Investors' capital is put into an account and the interest is used to pay the premium on the options.
Roose said KBC Asset Management decided to issue a fund on a basket of financial stocks because its analysts predicted growth will be stronger among these stocks than technology companies. Financial institutions traditionally fair better during recessions than less well-established companies. The basket of stocks includes Citigroup, Deutsche Bank and Credit Suisse.
Roose declined to name the options counterparty but said it chooses counterparties based on credit lines, price and secondary service. Secondary service is important when the bank buys a basket option because if there is a merger of two stocks in the basket it will have to restructure the option. The fund, dubbed KBC Equisase Finance Invest 4, is aimed at Belgian retail investors and has a minimum investment size of EUR1,000.
