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Deutsche Bank Markets First Capital Protected FX Trading Note

01 Jun 2003

Deutsche Bank has developed what is thought to be the first capital guaranteed bond that provides investors with a return from a quantitative fx trading strategy. Previous products have given investors currency exposure via fx options, but this instrument is non-directional. "This is an interesting product," commented an official at JPMorgan. JPMorgan has structured capital guaranteed products with options on macro hedge funds or relative value funds that have an fx component, but the official said he is unaware of any instrument similar to the Deutsche Bank note.

One of the fundamental drivers for the product is that equity returns and bond yields are not expected to be as high as during the bull market, according to Rashid Hoosenally, head of client strategy and product innovation for fx at Deutsche Bank in London. He declined to reveal the expected size of the issue.

Hoosenally explained that the fx strategy is a proprietary trading model based around the group of 10 currencies. It is non-discretionary--meaning it is a rules-based systematic trading model. In the new product, Deutsche Bank buys a zero-coupon bond and then uses the remaining capital to gain exposure to the strategy, while also actively controlling the risk. He declined to elaborate about the risk management strategy.

The model targets a Sharpe ratio of 1.5, providing 150 basis points of excess return for every 100 basis points of risk. "Our goal is to allow investors to double their return on a conventional fixed income investment without taking on any capital risk," Hoosenally said. He would not comment on who the product is targeted at, but competitors speculated that it could be aimed at retail investors.

A competitor said that one of the difficulties of structuring these types of bonds is the risk to reputation if the trading strategy does not perform as well as back testing suggests. Hoosenally said this is always a concern, but Deutsche Bank's trading strategy has been extensively researched and the fact that it is capital guaranteed helps to sell it to clients. That, coupled with the risk management discipline Deutsche Bank has developed "provides the confidence to those investors who wouldn't otherwise invest, to dip their toes into the market," he added.

01 Jun 2003