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Derivatives

Canadian Agency Eyes Exotic FX Derivatives

Canadian Export Development Corp., a government-owned agency with more than CAD20 billion (USD12.8 billion) in assets, plans to sell reverse dual currency structured notes for the first time as a way to capitalize on the broadening market in Japan for structured products. The agency plans to sell the products to raise capital, according to Chad Buffel, portfolio manager in Ottawa.

The ongoing fluctuations in the U.S. dollar against the Japanese yen and in the Japanese interest-rate market have brought these types of deals into favor. Buffel said, "It seems the only trade these people want to do. So we figured now is the time to start understanding it better." The product is a callable structure that moves the investor into a coupon that is paid out based on a foreign exchange rate between two currencies. "It's a swap with a better LIBOR number. Instead of being a single digit LIBOR it's double digit," said Buffel. "It's very lucrative," he quipped.

Although these types of trades have been in the market for at least three years, Buffel said the agency has waited to sell these products because its other structured markets have been highly lucrative and because the dual currency product is a complicated structure with a different pricing model. "We wanted to know what we were getting into before we started," he added.

Buffel said counterparties in the deals would need to have good penetration into the Japanese market, such as Gen Re Securities and Deutsche Bank. Under federal law, Canadian Export Development Corp. is required to work with banks that have credit ratings of double-A or higher. The agency provides insurance, financing and guarantees to Canadian exporters.

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