RBC currency-linked notes an 'interesting choice,' insider says, while JPMorgan plans contradictory basket

By Sheri Kasprzak

New York, June 12 - Royal Bank of Canada interested one market source on Thursday with its planned sale of notes linked to a basket of currencies.

The three-year notes are linked to the Japanese yen, the euro, the British pound, the Swiss franc and the Canadian dollar weighted equally, all versus the dollar. The notes are aimed at investors who expect declines in those currencies.

"It is of particular interest because it seems to indicate perceived strength in the dollar," said the market source.

"I think it's a solid strategy. The dollar is bound to gain some strength over the next three years, and it is, in fact, starting to show strength against these currencies."

The principal-protected notes pay par plus the greater of zero and the principal amount times a 120% to 140% participation rate. The exact participation rate will be determined at pricing.

JPMorgan takes different tack

Meanwhile, JPMorgan Chase & Co. took a different approach with $2 million in principal-protected dual-directional notes linked to almost identical currencies. These notes, however, anticipate appreciation of those currencies against the dollar.

The 31/2-year notes are linked to the British pound, the euro, the Swiss franc and the Japanese yen. The currencies are equally weighted.

The notes, according to a filing Thursday with the Securities and Exchange Commission, pay par plus the basket return times the 305% upside participation rate, assuming the ending basket level is greater than the starting level. If the ending basket level is less than or equal to the starting level, the notes pay par plus the absolute basket return times the 50% downside participation rate.

Lehman's euro-linked notes

In another similar sale, Lehman Brothers Holdings priced $8.083 million in principal-protected absolute return notes linked to the euro versus the dollar.

The three-year notes pay par plus the principal amount times the absolute currency return. The initial spot rate is 1.5566 euros.

JPMorgan's S&P-linked notes

In other news at JPMorgan, the bank priced $45.5 million in return-enhanced notes linked to the S&P 500.

The three-month notes pay par plus the principal amount times triple the index return, subject to an 8.25% maximum total return, assuming the ending index level is greater than the initial level. The investment is fully exposed to any decline in the index. If the ending index level declines from the initial level, the investors lose 1% of their principal amount for every 1% decline in the index from the initial level.

Lehman prices S&P notes

Similarly, Lehman priced $4.488 million in three-year annual review notes linked to the S&P 500.

The notes pay par at maturity, if the notes are not automatically called and a trigger event has not occurred. If the notes are called and a trigger event occurs, the investors lose 1% of the principal for every 1% the ending index level is below the starting level. The payout will be par plus the principal amount times the index return.

The notes will automatically be called if the index level on any review date is above or equal to the call level. If the notes are called on the first review date, the investors receive 12.5% times the principal amount. If the notes are called on the second review date, the investors receive 25% times the principal and if called on the final review date, investors receive 37.5% times the principal amount.

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