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Derivatives

Retail Investors Swap Capital Protection For Leverage

European retail investors are starting to favor leverage over capital protection as more start to believe equities are going to rally. Over the last two years a retail product had to be 100% capital guaranteed and offer some income to sell, but investors have recently been more interested in getting leveraged growth, said Andrea Minetti, head of Southern Europe institutional structured product sales at Deutsche Bank in London.

As part of the move investors are becoming increasingly interested in capped options. These offer highly leveraged participation in marginal increases, but the investor loses out if the index rockets. David Escoffier, head of equity derivatives at SG Corporate and Investment Banking in London, said the firm has structured products which offered less than 100% capital protection and used the extra cash to buy options which give a leveraged exposure of between 200%-300% to the market upside. In order to achieve those levels it capped the upside participation at 20%.

Structures are also turning to put spreads to reduce the cost of protection. John McLaughlin, head of structured investments at Schroder Investment Management in London, said a popular product guarantees 100% of the investor's capital as long as the reference assets do not fall by more than 50%.

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