Deutsche Bank has structured an offshore note linked to the Dow Jones EURO STOXX 50 Index that seeks to generate income and growth for U.K. retail investors. It is structured by selling investors two put options on the index, according to Benedict Peeters, a director in the structured products group in London. The firm is structuring it now because clients have been asking for products which protect them from an initial fall in equity prices in light of global equity market weakness.
Investors can choose an 8% annual return over its three-year life or receive up to a 25% return at maturity. The bank has chosen to structure the note on the Dow Jones EURO STOXX 50 because it contains a broad array of markets, including the U.K., and because U.K. investors are familiar with it, he said.
Peeters said one of the options is knocked-in if the index drops to 80% of its initial level, which will be set at the middle of next month after the offering closes. The strike on the knock-in put is 90% of the initial level. A second put is struck at 50% of the original level and both are geared by 2.5%. The coupon is generated by premiums on the options.
The index level at maturity is calculated using a weighted average of the previous month to protect against any last-minute drops. It is difficult to predict how much will be sold, given that U.K retail investors are largely unfamiliar with options, according to Peeters. "There hasn't been a lot of creativity on the derivatives side. [The U.K. is] better than a market like Spain or Italy but if you look at the Belgian market, it has far more complex structures, so we need to adapt to the U.K. market."
