Lehman plans notes linked to 25 currencies; Merrill Lynch, Goldman Sachs link to MSCI EAFE

By Kenneth Lim

Boston, March 4 - Lehman Brothers Holdings Inc.'s planned total return yield notes linked to 25 currencies offers a way to hedge against a loss of purchasing power for U.S. investors, a structurer said.

Lehman plans to price 1% one-year Fed trade-weighted total return yield notes linked to the performance of 25 currencies versus the U.S. dollar.

Interest will be payable at maturity.

The basket currencies and their corresponding weightings in the basket are designed to replicate the composition and weightings of the Broad Dollar index published by the Federal Reserve Board.

Specifically, the basket includes the euro, Canadian dollar, Chinese yuan, Mexican peso, Japanese yen, British pound sterling, Korean won, Taiwan dollar, Malaysian ringgit, Brazilian real, Hong Kong dollar, Singapore dollar, Thai baht, Swiss franc, Indian rupee, Australian dollar, Swedish kroner, Israeli shekel, Russian ruble, Indonesian rupiah, Saudi riyal, Philippine peso, Chilean peso, Argentine peso and Colombian peso.

The currencies with the largest weightings in the basket are the euro with a 17.577% weight, the Canadian dollar with a 16.524% weight, the yuan with a 15.101% weight, the Mexican peso with a 9.627% weight and the yen with a 9.492% weight. The remaining currencies each have a weight of less than 5%.

The payout at maturity will be par of $10,000 plus the basket return.

"It's a one-year note linked to the currencies that make up the Federal Reserve Broad Dollar index," the structurer said. "In that index there are 26 currencies; the weightings of each of these currencies are determined with regards to the imports and exports with each of these countries."

The buyer of the notes will be exposed to both gains and losses in the basket of currencies against the dollar. If the dollar weakens against the basket, the investor will gain on the notes. But if the dollar strengthens against the basket, the investor stands to lose on the notes.

The structurer said the notes effectively hedge against the weakening of the greenback compared to the currencies of the United States' key trading partners. If the U.S. dollar weakens against the basket by 10%, for example, an investor's U.S. dollar-denominated assets could be worth 10% less in terms of purchasing power. But the notes would help to ease that erosion of buying power, the structurer said.

"It's designed to protect the global purchasing power of U.S. investors' portfolios," the structurer said, adding: "Investors should think of the currency mix of their portfolios as global and not just G10. So a good global benchmark is the Federal Reserve Broad Dollar index."

Some of the currencies in the basket are also not easily accessible to most investors, the structurer said.

"Many of the investors have no way of getting access to some of these currencies, such as the Brazilian real or the Chilean peso, and it's not as levered as some of the other currency products out there," the structurer said.

"I think if anyone wants to protect the purchasing power of their investments this note has something to offer them," the structurer said.

Merrill Lynch prices MSCI EAFE-linked notes

Merrill Lynch & Co. Inc. sold $110.35 million of its 0% Accelerated Return Notes due May 4, 2009 linked to the MSCI EAFE.

The notes will pay par of $10 plus triple any index gain, capped at a maximum return of 21.24%, upon maturity. Investors will be fully exposed to any index decline.

The notes have been approved for listing on the American Stock Exchange under the symbol "MWL."

Goldman links to MSCI EAFE

The Goldman Sachs Group Inc. also linked a couple of offerings to the MSCI EAFE.

Its $8.36 million offering of 0% Absolute Return Trigger Notes due 2009 linked to the index will return 1% for every 1% increase or decrease in the index level upon maturity, capped at a maximum return of 18%.

If the index return exceeds the trigger range of negative 18% and positive 18%, the payout at maturity will be par of $1,000.

Goldman Sachs' $8.655 million offering of 0% Leveraged Equity Index-Linked Notes due 2009 tied to the MSCI EAFE will return three times the percentage increase of the underlying index, capped at an index return of 106.95%, if the index finishes above its initial level.

If the final index level is unchanged or at least 90% of the initial level, the payout at maturity will be par. If the final index level falls below 90% of the initial level, the payout will be par minus about 1.1111% of the principal for every 1% decrease below 90% of the initial index level.

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