Credit Suisse’s capped leveraged notes linked to MSCI India offer single-country bet, FX hedge

By Emma Trincal

New York, April 27 – Credit Suisse AG, London Branch plans to price 0% notes due April 2019 linked to the MSCI India index, according to a 424B2 filing with the Securities and Exchange Commission.

If the index return is positive, the payout at maturity will be par of $10 plus 200% of the index return, subject to a maximum return that is expected to be 36% to 40% and will be set at pricing. If the index return is negative, investors will be fully exposed to the decline.

The final index level will be the average of the index’s closing levels over five trading days shortly before maturity.

ETFs versus notes

Currency movement has no impact on the performance of the notes, according to the prospectus.

An exchange-trade fund, the iShares MSCI India ETF, tracks the return of the underlying index. Unlike the notes, which hedge currency risk, shareholders in the ETF are subject to risks associated with exchange rate fluctuations.

“This is one of the benefits of structured notes versus ETFs,” a market participant said, referring to this as “quanto” or “quantity-adjusting option.”

The U.S. quanto is a derivative technique that removes currency risk exposure. That way, U.S. investors in foreign indexes can focus on their equity bet.

“They just give you the performance of the index in dollar terms without having to do the FX translation,” he said.

If the Indian rupee depreciates against the dollar, the noteholders will not lose money as a result of the hedge.

Neat hedge

“With the notes, U.S. dollar quanto means the investor gets the index performance as if the index was quoted in U.S. dollar terms,” he said.

“The idea is to be currency neutral. That’s what a structured note can achieve for you. It’s a clean way to eliminate the exposure to exchange rate risk. Some ETFs are sold on that premise, but their currency hedges are vague, and I’m not a big fan of those.”

Most structured notes linked to foreign equity indexes are quanto, said an industry source.

“If it wasn’t quanto, you’d lose some money when the dollar appreciates and make money when it drops against the local currency.

“I think it would be hard to explain it to investors, though.”

Terms

The structure of the notes is “pretty reasonable,” he said.

“It’s over 10% a year.

“The downside is one for one, so that’s good.

“It seems like a worthwhile trade to get exposure to the Indian stock market if that’s what you’re looking for.”

The agent is BofA Merrill Lynch.

The notes will price in April and settle in May.

© 2015 Prospect News.
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