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Given the global speculation surrounding the potential appreciation of the Chinese renminbi, and with it other Asian currencies, over the past two years, it's no surprise that interest has swelled among regional investors towards investing in currency structured products. The demand from private bank investors who mainly invest in medium-term notes, has been strong. The top 20 investment banks issued US$9 billion of Asian currency-linked medium-term notes (excluding Japanese yen) in 2004, rising to US$13 billion in 2005 with US$6 billion issues so far this year.
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Credit-linked products have benefited from the global rally in bond spreads despite a couple of high-level downgrades last year that affected the broader market. The market has continued to grow robustly - one banker estimates that it has doubled in size every year since 1999. And many of Asia's institutional investors have been extremely active. The most popular underlying instruments have tended to be collateralized bond obligations (CDOs)—both cash and synthetic, credit default swaps (CDS) and constant portfolio protection insurance (CPPI) products, which have an actively managed portion that is generally linked to credit default swaps or a tradeable CDS index such as Dow Jones' CDX and iTraxx indices. Products linked to CDSs and indices are typically bespoke and tailored to take advantage of the correlation in default patterns among borrowers.
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Over the past year, equity-linked products have enjoyed a bonanza on the back of burgeoning regional stock exchanges. Hong Kong's Hang Seng Index offers one example, rocketing from 13,481 in January 2005 to 16,661 now.
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