Currency products weather turmoil, but investors still careful about risks, distributor says

By Kenneth Lim

Boston, April 28 - Demand for currency-linked structured products has been relatively consistent throughout the current market downturn because of a pool of savvy investors, a distributor said.

A number of currency-linked products were launched earlier this week.

Bank of America Corp. plans to price two-year zero-coupon Currency Market Index Target-Term Securities linked to the performance of a basket of currencies relative to the dollar.

The basket includes equal weights of the Brazilian real, Chinese renminbi, Indian rupee and Indonesian rupiah.

The payout at maturity will be par of $10 plus 100% to 130% of any appreciation in the basket relative to the dollar. The exact participation rate will be set at pricing. If the basket depreciates relative

to the dollar, investors will receive par minus the decline, subject to a maximum loss of 3%.

Barclays Bank plc plans to price zero-coupon principal-protected notes due May 31, 2012 linked to the Barclays Intelligent Carry Index Excess Return.

The index is designed to reflect the total return of a carry strategy, which seeks to capture the returns that are potentially available from a strategy of investing in high-yielding currencies with the exposure financed by borrowing in low-yielding currencies. The currencies to which the index may apply these strategies are the U.S. dollar, euro, Japanese yen, Canadian dollar, Swiss franc, British pound sterling, Australian dollar, New Zealand dollar, Norwegian krone and Swedish krona.

The payout at maturity will be par plus 150% of any index gain. Investors will receive at least par.

Morgan Stanley is also offering zero-coupon principal-protected notes due May 29, 2012 linked to a basket of nine currencies relative to the U.S. dollar.

The basket comprises 11.6667% weightings for each of the Australian dollar, the British pound, the Canadian dollar, the euro, the Japanese yen and the Swiss franc; and 10% weightings for each of the Brazilian real, the Chinese renminbi and the Indian rupee. The six developed market currencies form 70% of the basket weighting, while the three emerging currencies form the remaining 30%. The basket return increases if the currencies appreciate against the U.S. dollar.

At maturity, investors will receive par plus 160% to 180% of any gain in the basket. Investors will not receive less than the principal. The exact participation rate will be set at pricing.

Stable business

Although concerns about the credit quality of issuing banks have hit demand across the board, investor interest in currency products has been relatively stable compared to equity-linked products, the distributor said.

"FX and commodities have done relatively better," the distributor said. "A lot of people took losses no matter what asset class they were in, but I think there has been a little bit more stability in those asset classes."

The fact that there is a less retail presence in the currency segment of the industry is a big factor, the distributor added.

"I think they're less likely to run and hide when things don't go well," the distributor said. "A little more rationality, willingness to take risks."

Risk still a priority

But the investors in currency products are hardly foolhardy gamblers, the distributor noted. Buyers in that field have also increased calls for principal protection, and are wary of issuers who do not have strong credit.

"There's a distinction between the risk of the trade itself and the risk of the wrapper," the distributor said. "The trade is something they're comfortable with. It's the other risks they're more careful about."

Recent optimism about the state of the U.S. economy could spur more interest in the asset class, the distributor said.

"If investors think the economy is improving, there could be more interest in dollar-bearish products," the distributor said.

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