Banco Guipuzcoano has purchased a three-year basket call option quantoed into euros on the Nikkei 225 and the Dow Jones EURO STOXX to structure a deposit account for Spanish retail investors. The options return the increase of each of the indices above their levels when the option was purchased. Alfredo Urrutia, head of derivatives in San Sebastian, said the deposit account puts half the investor's money into a three-year guaranteed deposit which gives 50% participation in each of the indices and offers a 100% capital guarantee. The other half of the investor's capital is put in a deposit account for one year, which pays 6% interest, 140 basis points more than one-year Euribor when the trade was put on earlier this month. After a year the investor gets this half back. The bank loses money on the cash placed into the deposit account but makes it back, along with a profit, from the margin on the guaranteed portion of the deposit account.
Urretia said, "The man on the street does not want to invest in guaranteed funds at the moment. He needs a sweetener." When indices are falling, investors find guaranteed products unattractive, because they fear they will only get their principal back, rather than earning a positive return. The deposit account is the sweetener here, assuring investors that they will receive some return in the near term. Urrutia chose to link the account to the Nikkei and EURO STOXX indices because he expects them to rise as investors take money out of the U.S. and look for other markets to invest in. Furthermore, the indices have fallen over the last year and options on them were cheap.
Urrutia declined to name the bank he bought the options from but said it was an international double-A rated bank. After credit rating, price is the most important factor in choosing a counterparty. The minimum deposit is ESP1 million (USD5,700).