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Derivatives

Deutsche Bank Sells Retail Lookback Option

Deutsche Bank is planning to sell equity-linked notes that will allow investors to gain exposure to an equity index at its low point for the year by using a lookback option. The product marks the first time lookbacks have been packaged into a certificate and sold to retail investors, as they were previously only used by institutional investors, according to Johan Groothaert, managing director and head of equity structured products and alternative investments in London. Several rivals corroborated the claim and said the product appears to be the first of its kind.

The option gives the buyer the retrospective right to buy the underlying, in this case an equity index, at its minimum monthly average value for the year, which will be determined at the end of 2002. Groothaert said Deutsche Bank structured eight-year notes based on the firm's Global Opportunity Index. The index, an equity portfolio with exposure to the U.S., Europe and Asia, has outperformed the MSCI World Index by 7% over each of the last eight years. The firm will offer the notes to high-net-worth investors from this week. It plans to sell a minimum of EUR500 million.

"It's just the same as an index-tracking fund but we have built in the lookback option which gives the certainty that investors will get in at the lowest monthly average," Groothaert said. The eight-year duration is used because historically, equity markets tend to post gains in any one eight-year span. However, the lookback component only works for the first year and if the index touches new lows in the second year, investors' entry point does not change. The notes are designed with the assumption that equity markets will touch their lows next year, if they haven't already this year, as central bank rate cuts filter through. Just in case, the bank plans to offer the notes based on lookback options for 2003 as well.

The structure works by investors waiving their dividend payments from the index, which are then used to finance Deutsche Bank's own hedging, which is done in a variety of markets. The risk is offset by the bank's positions in other equity products and by a variety of options on a basket of global equity indices. The index had a dividend of 1.3% last year. However, Karen Fang, a senior product developer in London, noted that the lookback option has historically been worth more than the divided payments.

In addition to expectations of a turnaround in global equity markets next year, Fang added the certificates are being sold now because of weaker investor appetite for capital guaranteed structures. "With rates so low, they would either get a low cap or low participation," she said, adding, "we think the economy will rebound, you don't have a high risk of losing capital."

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