Goldman links product to euro; notes' upside attractive, advisor says; Lehman sweetens ComBATS notes

By Kenneth Lim

Boston, May 15 - Goldman Sachs & Co. is offering an unusual current-linked product tied to exchange rates against the euro.

"It's quite a conservative structure and I like that they don't cap your upside, but it requires a very particular view of the exchange rate," an investment advisor said.

Goldman ties to euro

Goldman Sachs plans to price the zero-coupon principal protected notes linked to a basket of eight currencies against the euro.

The notes will mature after 24 to 27 months. The tenor will be determined at pricing.

The basket comprises equal weights of the Brazilian real, the Russian ruble, the Indian rupee, the Malaysian ringgit, the Singapore dollar, the Mexican peso, the Australian dollar and the Norwegian krone. The basket's value increases if its component currencies strengthen against the euro.

If the basket return is less than 2% at maturity, the notes will return par of $1,000. If the basket return is between 2% and a step-up percentage between 14% and 16%, the notes will return par plus the step-up percentage. If the basket return is the step-up percentage and above, the notes will return par plus a participation rate of 1.4 times to 1.6 times the basket return.

The step-up percentage and participation rate will be determined at pricing.

Investors will receive at least par.

Uncapped upside attractive

The Goldman Sachs notes offer good participation on the upside while offering good protection, the advisor said.

"I think this note is interesting because it's got principal protection but also has leveraged participation on the upside and no limit," the advisor said. "So the worst you can do is getting back your principal. But if the basket does well, you get a leveraged participation on the basket return and your return isn't capped."

"Many times with some of these leveraged principal protected notes they cap your maximum return, but in this case they don't do that, so that's a feature I like," the advisor added.

But the advisor said the notes require investors to take a peculiar view of where the euro is headed.

"You really have to have a very specific view of the euro, the advisor said.

"First of all, you don't want it to just drop a little, because if it's only down by 1%, or actually if the basket is only up 1%, you only get back your principal. And the best case for you actually is if the basket goes up by 2% to 10%, assuming the 1.5% participation rate and the 15% step-up, because your participation rate in that case will be better than 1.5. And you don't want the basket to go up between 10% and 15%, because your participation rate goes down again, then jumps back up to 1.5 when the basket return hits 15%. So if you chart the participation rate against the basket return, it starts really high at the 2% basket return, then drops to 1 when the basket return is just below 15%, then goes back to 1.5."

"You're getting a leveraged participation in all those cases, but that leverage goes up and down," the advisor said. "Sometimes you have a view that something is going to be range-bound. In this case you want it to be within a couple of ranges, so it's range-bound and then some."

Notes may attract newcomers

The notes could be attractive for investors who want a conservative investment in foreign currencies, the advisor said.

"I could see some investors who aren't so familiar with currencies getting in this," the advisor said. "It's principal protected, so if you're new the only downside you're looking at is really the opportunity cost, or underperforming some other kind of investment. The leveraged participation is also attractive to investors."

But the advisor said the peculiar return structure suggested that investors should do careful research before taking on the investment.

"I'd say you'd want to do your research before investing in this," the advisor said. "It's an interesting product, but it requires you to have a very specific view of the underlying."

Lehman sweetens ComBATS notes

Lehman Brothers Holdings Inc. is sweetening the participation rate on its four-year notes linked to the Lehman Brothers Commodity Based Alpha Trading Strategies I (ComBATS I).

Lehman first offered the zero-coupon product earlier in the week with a payout at maturity set at par plus 150% of the strategy performance, subject to a floor of par.

The latest prospectus has a participation rate at 165% of the strategy performance.

ComBATS I is designed to be a monthly resetting market neutral alpha strategy that reflects the difference between the monthly returns on a basket consisting of a long position in the Lehman Brothers

Commodity index Pure Beta Excess Returns of 10 single-commodity subindexes and a short position in the Lehman Brothers Commodity index Excess Return single commodity sub-indexes for the same 10 commodities.

The Pure Beta index is itself a rules-based index that seeks to mitigate distortions in the commodity markets associated with investment flows and supply disruptions as well as potentially negative yield when commodity futures contracts are rolled over.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.