Dresdner Kleinwort Wasserstein is structuring capital guaranteed products with long-dated zero-coupon bonds in a novel twist designed to provide a fatter potential payout on the option component. Matthias Schellenberg, head of equity structured product sales for Germany and Austria in Frankfurt, said the issue price for a 30-year zero is approximately 20% of the redemption value whereas the price for a three-year zero is about 80% of the redemption value. By purchasing the cheaper 30-year zero, Dresdner can spend more on an option to provide upside participation.
Several rival bankers said they had not seen structures similar to this but agreed there was a demand to give investors more upside participation because of the rising cost of zero-coupon bonds. They have achieved this by using exotics, such as Asian options, which are cheaper than plain-vanilla calls and puts.
German insurance companies and pension funds typically need to use capital guaranteed products instead of taking outright positions via the options market. However, the downward trajectory of interest rates has made short-dated zeros more expensive and therefore left structurers of guaranteed products with less cash to buy options.
With Dresdner's product the investor can pick up the extra leverage and then sell the zero-coupon bond when the option has matured. Schellenberg said this structure could be used for any option where the investor wants a guarantee. He declined to give a specific example.
Volker Grever, head of the investment and derivatives unit at the German insurance and pension fund regulator Bundesaufsichtsamt für das Versicherungswesen, in Bonn, said the maturity mismatch between the zero and option does not present regulatory problems. Insurance companies and pension funds may enter simple structured products for investment reasons if the products offer a capital guarantee and they are not taking a short position, he continued. Grever was not familiar with Dresdner's product.
