Euro Stoxx 50 index may provide better terms for deals due to higher volatility, analyst says

By Sheri Kasprzak

New York, Sept. 21 - A large slate of offerings this week were linked to the Euro Stoxx 50 index, and part of the reason could be increased volatility in the index, said Suzi Hampson, analyst with Future Value Consultants of London.

"I guess most of the products that we see linked to indices are linked to the S&P [500 index] in the U.S.," Hampson said Friday.

"The volatility for 1½ years is about 18.5%, whereas the Euro Stoxx 50 is 23%, slightly higher. The contingent return they can offer is partly contingent upon the volatility of the underlying. The higher the volatility, the more likely the barrier will be breached, the higher the payout. They can offer better terms for investors than if they used the S&P [500], and it's still a recognized, big index."

Barclays preps deal

Barclays Bank plc and JPMorgan Chase & Co. were among the investment banks with 0% knock-out notes linked to the index this week.

Barclays announced plans to price 0% notes due March 26, 2014 linked to the index.

If the index's closing level is greater than or equal to the barrier level, 70% of the initial index level, on each day during the life of the notes, the payout at maturity will be par plus the greater of the index return and 7.25%. Otherwise, the payout will be par plus the index return, which could be positive or negative.

The notes (Cusip: 06741TGT8) were expected to price on Friday.

Barclays is the agent with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC as dealers.

JPMorgan Chase priced $4.1 million of 0% knock-out notes due March 19, 2014 linked to the index, according to a 424B2 filing with the Securities and Exchange Commission.

A knock-out event occurs if the index's closing level is less than the initial level by more than 30% on any day during the life of the notes.

If a knock-out event has not occurred, the payout at maturity will be par plus the greater of the index return and 6.1%. If a knock-out event has occurred, the payout will be par plus the index return, which could be positive or negative.

J.P. Morgan Securities is the agent.

Index is safer than stocks

As is the case most of the time with indexes, investing in the Euro Stoxx 50 is safer than investing in individual stocks.

"Maybe investors are looking for some exposure to Europe, and rather than a fund or a tracker, they'd rather go with an index," Hampson said.

"Generally, when we look at any kind of stock versus indices, the index has lower volatility. Here's 50 stocks, and if one suffers, then you still have the rest of the index. Generally, an index rather than stock is seen as a lower-risk alternative. These products have a barrier at 70%. If you invested in a tracker fund, you wouldn't have any built-in protection."

Deutsche Bank's deal one of largest

As a matter of fact, the second-largest offering of the year was linked to the index.

Deutsche Bank AG, London Branch priced $429.64 million of 0% knock-out notes due March 19, 2014 linked to the index via JPMorgan.

If the index level decreases by more than 20% on any day during the life of the notes, the payout at maturity will be par plus the index return, with full exposure to any losses. Otherwise, the payout will be par plus the greater of the index return and 7.6%.

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