Merrill Lynch product goes long on emerging currencies, short on euro; Goldman takes lead in league table

By Kenneth Lim

Boston, April 30 - Merrill Lynch & Co. Inc. announced an unusual product on Wednesday linked to a currency basket based on exchange rates against the euro.

"That's interesting," a distributor said. "I don't think I've seen this before."

Merrill Lynch plans to price zero-coupon 97% principal protected notes due May 2010 linked to a basket of four currencies against the euro.

The basket comprises equal weightings of the Indonesian rupiah, the Russian ruble, the Malaysian ringgit and the Philippine peso.

At maturity, each $10 note will pay 97% of par plus 200% to 220% of any gain in the basket. If the basket ends below its starting level, the payout will be 97% of par. That means the basket must gain 1.36% to 1.5% from its initial level, depending on the participation rate, for investors to receive at least par.

The participation rate will be set at pricing.

"The notes are designed for investors who anticipate that the value of an Indonesian, Russian, Malaysian, and Philippine currency basket as compared to the European Union euro ... will increase from the pricing date to a date shortly before the maturity date," Merrill stated in an offering notice. "The value of the basket will increase if the value of the basket's long currencies (the Indonesian rupiah, the Russian ruble, the Malaysian ringgit, and the Philippine peso) appreciates against the basket's short currency (the European Union euro). The value of the basket will decrease if the value of the long currencies depreciates against the short currency."

Notes combine strategies

The notes can be viewed as a dollar-based outperformance note, the distributor said.

"What this looks like is very simply a long-short kind of structure," the distributor said. "I think what you might have seen more is a note which is linked to two baskets, let's say those rupiah, ruble, ringgit, peso, against the U.S. dollar, and you're long on that basket. And the second basket is the euro against the U.S. dollar, and you're short that basket, and at maturity you return the outperformance of the long basket against the short basket. This just takes out that middle portion, the U.S. dollar, and compares the long directly to the short basket."

The structure could make it easier for investors to keep track of the notes, the distributor said.

"I'd say it's one less currency to worry about," the distributor said. "It's a more direct way of structuring an outperformance kind of product. Of course, you can't really do this with equity or commodities because they don't have mutual exchange rates, but it's definitely good for currencies."

Euro in spotlight

The product could be trying to tap current market interest in the euro, the distributor said.

"There's been a view in the market that the G10 currencies may be too high right now, so this could capture some of that sentiment," the distributor said. "If you think the euro isn't going to do as well as some of these emerging market currencies, then this product makes sense.

"What's interesting is that even if the long currencies do poorly, as long as the short currency does worse you would potentially make money on this."

Goldman leads league

Goldman Sachs overtook Morgan Stanley in the structured products league table after a strong showing in April, according to data compiled by Prospect News.

Goldman Sachs had $3.68 billion from 104 offerings as of the end of April, a 13.61% market share, with most of those deals linked to stocks or equity indexes.

Year-to-date issuance totaled $27.04 billion from 2,484 offerings, 76.7% more than in the same period a year ago. Issuance in April was also up year on year, with $4.33 billion worth of products sold. The April numbers reversed the decline in March, when credit concerns put a damper on new offerings.

© 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.