ABN Amro links reverse convertible to Exxon Mobil; market expecting volatility to decline, analyst says

By Kenneth Lim

Boston, Feb. 13 - Investors could be more open to making investments in the energy sector as volatility in the space settles down, said structured products analyst Suzi Hampson.

"I think at the moment the historical volatility is higher than implied volatility, which hasn't been the case a few months ago," she said.

During the week, JPMorgan Chase & Co. priced buffered return enhanced notes linked to a basket of energy stocks, then offered more of the same product as well as notes linked to the S&P GSCI Crude Oil index. Barclays Bank plc also priced reverse convertibles linked to United States Oil Fund.

AB Svensk Exportkredit launched capped leveraged notes linked to the Merrill Lynch Commodity eXtra Brent index through Merrill Lynch, while ABN Amro Bank NV launched reverse convertibles linked to ConocoPhillips and Exxon Mobil Corp.

ABN Amro links to Exxon Mobil

ABN Amro is offering 10.75% reverse convertibles due Aug. 31, 2009 linked to the common stock of Exxon Mobil.

At maturity, investors will receive par unless Exxon stock closes below 80% of its initial level during the life of the notes and the underlying stock finishes below its initial level. Otherwise investors will receive a number of Exxon shares equal to par divided by the initial share price.

Easing volatility

Exxon Mobil's volatility has been declining in the past few months, Hampson said.

"Volatility has been a downward trend," she said. "It was very high in mid-October...but it has started to come down a bit."

Lower volatility usually makes reverse convertibles appear less exciting because issuers are only able to offer lower coupons, she said. But investors could also be more ready to invest as the risk profile of the products become more palatable.

"It makes reverse convertibles harder to price to be attractive," she aid. "But because it's coming down a little people might be more willing to invest in it because it's less risky than three months ago."

The implied volatility is also lower than historical volatility, Hampson noted.

"It basically means that the market thinks the stock's going to be less volatile than it's been in the last year," she said.

The difference between historical and implied underlying volatility can be seen in Future Value's analysis of the product.

The firm assigned the notes a value rating of 7.65 out of a best possible 10, reflecting the firm's estimate of the value of the product after fees and the issuer's profit margin are taken out. The value rating uses implied volatility. But the product's return rating, which is based on an estimated risk-adjusted return potential, was a low 0.94 out of 10. The return rating uses historical volatility.

Pattern likely common

Expectations of lower volatility probably extend beyond Exxon Mobil to other names in the energy sector and even the broader equity market, Hampson said.

"I would have thought it would be likely, because there's been so much movement in the last year," she said.

© 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.