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Derivatives

Option Innovation Gives Grandparents Gift Ideas

Saga, which specializes in products for the elderly, is pitching a structured note with an embedded first-of-a-kind house price option to grandparents as the ideal gift for new born grandchildren. The option, structured by Abbey National Financial Products, is the first time house price options have been sold with a 15-year maturity, according to Mario Pytka, head of equity derivatives at ANFP in London. Previous options have had maturities of five years or shorter. A house price option gives investors synthetic exposure to a house price index.

Pytka said it was able to offer the option now because its book is large enough to be able to offset and manage the risks. In addition, the product is capital guaranteed so the recent interest rate rally has made it more attractive.

The note, known as the Grandchildren Bond, offers investors twice the upside performance of the Halifax house price index over 15 years.

Pytka said it is looking into using these type of call options for offshore products that give U.K. ex-patriots exposure to the house market. Nick Hurman, director of Saga Investment Direct in Bournemouth, said an option with this kind of maturity could also be used to allow grandparents to make contributions to their grandchildren's pensions. Changes in U.K. legislation mean grandparents can now obtain tax relief for these contributions.

The investment period begins on Jan. 21. The product can not be redeemed before maturity.

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