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Derivatives

German Firm Sells New Reverse Converts

Sal Oppenheim Jr. & Cie. has structured reverse convertible bonds based on shares in two German corporates that guarantee investors a 12.5% coupon by trading equity options with investors. The firm buys a put from investors to beef-up the coupon and sells a put to provide the guarantee.

An official in the structured credit department in Frankfurt said the firm has structured what it calls PROGRANT reverse convertibles based on shares in Deutsche Telekom and Siemens and is considering using other European corporates, such as Nokia and Telefonica as underlyings.

In the Deutsche Telekom reverse convertible investors sell to Sal Oppenheim one-year maturity puts struck at EUR17.67 and at EUR13.25. If the telecom company's shares end up below the lower strike investors will receive 75% of their capital in addition to the 12.5% coupon; if the shares are between the strikes after one year, investors will be exercised on the option with the higher strike and take delivery of the shares. Deutsche Telekom shares were trading at EUR16 Tuesday.

The bonds are being marketed to retail investors, who benefit from the 12.5% coupon and receive 75% of their capital back even if Deutsche Telekom shares drop below the second strike, according to the official. Sal Oppenheim makes 20 basis points off each sale. In the transaction, the bonds are sold at 98.07 and cost the issuer 97.87, the official said.

The firm has set a minimum investment of EUR5,000, based on 283 shares of Deutsche Telekom, and hopes to sell up to EUR25 million of the bonds. He said Sal Oppenheim will create similar products with other European underlyings if they prove popular enough.

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