Demand for structured foreign exchange notes linked to dollar/yen or euro/yen has doubled in the last weeks in comparison to February as Japanese corporates, insurance companies and institutional investors lock in trades before fiscal year-end--at the end of the month. "We're seeing a lot of last minute portfolio allocations before year-end," said a trader at Lehman Brothers in Tokyo. "We're on a pace for a 150% increase from February," he noted, adding that about JPY120 billion (USD912 million) in structured notes went through the market last month.
A derivatives structurer at Credit Lyonnais in Tokyo agreed, adding, "We're starting to see these in larger sizes."
A typical note has a 10 to 30-year maturity with an embedded call option allowing the issuer to call the note after the first year. These can be structured with semi-annual or annual coupons. The average size is JPY20 billion. For instance, a 10-year dollar/yen note will yield up to 4-5% per annum if the currency pair stays above JPY85.
