Fortis Bank plans to buy a two-year knock-in put to structure a knock-in reverse convertible linked to shares of Royal Dutch. Leen Verdonk, derivatives salesman in Amsterdam, said the EUR50 million (USD45.73 million) put will be struck at a value equal to the stock's price at Wednesday's close. The knock-in level will be 10% below the strike. Royal Dutch shares opened at EUR66.46 last Monday.
Dutch investors are keen to buy reverse convertibles on Royal Dutch now because the price of Brent crude oil has fallen to around USD27 a barrel, levels the market believes are more sustainable than the historic highs hit late last year, said Allard de Buijzer, equity analyst at Fortis in Amsterdam. The share price of the energy giant has hence remained relatively stable recently. Investors did not want to buy the stock when the oil price was exceptionally high because they did not know how the share price was going to react when the oil price fell, he noted. Royal Dutch could fall slightly in line with oil prices, he added, but it is a strong company and normally outperforms the Dutch index. Royal Dutch is a well known name in the Dutch market, which was important for this issue because the reverse convertible is aimed at Dutch retail investors, said Verdonk.
The implied volatility on the put is 25% and the premium is 10% of the notional size. The reverse convertible pays investors a coupon of 9.25%. The minimum investment is EUR2,000.
A reverse convertible is the synthetic equivalent of an investor buying a bond and selling an equity put. The premium investors earn from selling the put is used to beef up the coupon on the bond. If Royal Dutch's share price falls 10% before maturity, the put knocks in. At maturity, the put is cash or physically settled, with the investor's principal being used to purchase the shares of the stock.
