Deutsche Bank, Goldman Sachs offer emerging market currency products

By Kenneth Lim

Boston, May 23 - A number of emerging market currency products offer investors a way to gain exposure to complex and otherwise accessible currency pairs, an investment adviser said Monday.

Deutsche Bank AG, London Branch, plans to price zero-coupon Step Return Buffered Securities due June 28, 2013 linked to a basket of currencies relative to the Japanese yen.

The basket currencies, all equally weighted, are the Brazilian real, the Russian ruble, the Indonesian rupiah, the Chinese renminbi and the Korean won. The basket level increases as the basket currencies appreciate against the yen.

If the basket performance is zero or positive at maturity, investors will receive par plus the basket performance or the step return of 17.25% to 19%, whichever is greater. The exact step return will be fixed at pricing.

The maximum payout is 200% of the principal.

Investors will receive par if the basket declines by no more than 10%. Investors will lose 1% for every 1% decline in the basket level beyond 10%.

The Goldman Sachs Group, Inc. is also offering a series of 18-month zero-coupon notes linked to an equally weighted basket of the Malaysian ringgit, the Indonesian rupiah and the Singapore dollar, all against the U.S. dollar.

The value of the basket increases if the underlying currencies appreciate against the greenback.

At maturity, investors will receive par plus 2.08 times any increase in the basket. There is no return cap on the upside.

Investors will receive par is the basket is flat or falls by no more than 5%. Investors will lose 1.0526% for every 1% that the basket declines by more than 5%.

Emerging access

Both products offer investors a convenient way to access emerging-market currencies, the adviser said.

"The thing about structured products is you don't actually have to own the underlying asset," the adviser said. "I can get a pretty good proxy exposure to the renminbi, for example, without actually having to own the renminbi."

The adviser noted that some emerging currencies, such as the renminbi, are not traded freely because of currency controls, and synthetic products are often a key way to trade in those assets.

"For the retail investor, they just want to gain some kind of exposure to the currency but they don't want to have to jump through all the hoops," the adviser said.

Structured products can also offer leveraged returns on the performance of the underlying, which could be attractive in currencies because changes in exchange rates can be small.

"The leverage really allows you to aim for much better returns," the adviser said.

Leveraged risk

But the adviser said currency-linked products can be highly risky for retail investors. The buffers on the Deutsche Bank and Goldman Sachs products, for instance, are smaller than ones that are generally found on equity-linked products, the adviser said.

"A 5% buffer doesn't provide you with a lot of protection," the adviser said. "It's actually a pretty aggressive product because it's extremely attractive when the bet is right and potentially very painful when the bet is wrong."

Investors should also consider why they want to gain exposure to certain currencies in the first place.

"Investing in currencies makes sense in some cases as part of a portfolio if you're looking to diversify your exposure or to add some negative correlations in the mix," the adviser said. "If you think Japan is going to underperform the BRIC countries in the next two years, that's fine. But why buy the currencies? Why not just buy a Russian ETF and short a Japanese ETF?"

© 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.