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Derivatives

Commodity Investment Notes Get Barrier Juice

Morgan Stanley and Lehman Brothers have launched commodity-linked investment notes offering high coupons providing the underlying stays above or within a certain range or barrier.

Morgan Stanley and Lehman Brothers have launched commodity-linked investment notes offering high coupons providing the underlying stays above or within a certain range or barrier. The use of barrier options to add juice coincides with market commentators suggesting the commodities bull market may be tailing off and investor interest slacking.

Morgan Stanley priced last week USD5 million of so-called HITS notes, named for high income trigger securities. The notes offer 12% per annum return, providing a basket of four commodities--copper, nickel, aluminum and zinc--does not drop below 65% of its value at launch. The notes close to investors Tuesday and mature May 2008.

Lehman Brothers has made similar use of barrier options for what it is calling Wedding Cake notes. In this structure, the investor receives 18% return after a year providing the underlying crude oil futures contract stays within an upper barrier of 115% of initial strike and 85% of initial strike. If the contract is outside this range, but within 82-118%, the investor receives 11% and if the contract is outside that second range but within 73-127% of initial price, the investor receives 5% return. Capital is 100% protected even if the contract trades outside of the final range's barriers. Lehman priced USD3 million of the notes two weeks ago and the offering also closes Tuesday.

Morgan Stanley and Lehman officials did not return calls by press time.

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