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Structured Product Teach-In 11 th November 2010. Who we are What is a structured product? Under the bonnet Actual pricing We don’t just do equity linked.

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Presentation on theme: "Structured Product Teach-In 11 th November 2010. Who we are What is a structured product? Under the bonnet Actual pricing We don’t just do equity linked."— Presentation transcript:

1 Structured Product Teach-In 11 th November 2010

2 Who we are What is a structured product? Under the bonnet Actual pricing We don’t just do equity linked notes Secondary market Summary Agenda

3 Who we are

4 LLP – Team of 6 + Non-Executive Chairman FSA authorised securities and futures firm Origination and distribution business that offers and supports Private Placement securitised derivative products to professional asset managers and institutions in the UK Issued over GBP558mm primary market and over GBP250mm secondary market trading in two full financial years since 1 August 2008 Introduction

5 How we operate We talk to you directly We coordinate each bank’s trading, structuring and settlement teams, issuing securities that optimise your investment views You trade and settle with the respective banks directly using Crest/Euroclear We coordinate, advise and support all sales and redemptions for each bank We advise on product platforms and regulatory issues, deferring to external lawyers where necessary We offer structured products and derivative strategy training We can offer you access to the products, platforms and trading expertise of five leading investment banks In addition, we are able to source swaps (bonds and derivatives) from additional third parties where attractive Our website is fully functioning and will act as a portal for clients to access the primary and secondary market products of each of our partner banks

6 Costs We are not an extra layer of costs but are replacing each bank’s resource in this market in return for a share of its P&L We are not brokers who will change [XX%] on top of the banks’ issue costs We have agreed with each bank that charges will be in a range of 0.5%-2% of notional, to include prospectus, hedging, taxation advice and P&L. Our fee is a share of the P&L part of the costs – we can resource ourselves much more efficiently than can a sales team within a bank. Every penny is real to us - this will be reflected in competitive pricing We aim to be extremely agile and dynamic

7 Banks we work with predominantly HSBC Rating AA / Aa2 Solid Capital Base, popular counterparty. One of the tightest Credit Default Swaps Key vehicles; Exchangeable Warrant Programme; MTN Note Programme JPMorgan Rating A+ / Aa1 Solid capital base, one of tightest Credit Default Swaps Key vehicles; EIS, MTN Societe Generale Rating A+ / Aa2 Solid capital base. Strong links to its Government Leading derivatives player Key vehicle; Lyxor Funds (Lux), ESOL Notes, CODEIS (Lux)

8 Banks we work with Citi Rating A / A3 Relatively good funding spreads Best secondary market process Key vehicles; Symphony Structured Products (Jersey) Ltd; Allegro Investment Corporation Nomura Rating A- / Baa1 Good funding spreads. Key vehicle; STAGs (Securities Taxed As Gains) exchangeable bonds (similar to Barclays Simple) EIS, MTN Collateralization Most structures can be collateralized to mitigate counterparty credit risk if required

9 What is a Structured Product ?

10 STRUCTURED PRODUCT Income or Growth Taxation Investment Term Counterparty Underlying Asset Investment Objective Wrapper Capital Protection Something where the investor sets the parameters

11 MULTI ASSET UNDERLYINGS RISK MANAGEMENT Predictable paths Conditional/ Unconditional return Defined Risk & Return Reduced Volatility Capital Protection Funds/ Absolute return Volatility/ Correlation/ Dividends Inflation/ Commodities Interest rates Currencies/ Credit Equities/ Indices Liability Driven WRAPPERS Medium Term Notes Warrants/PCC/ Excluded Indexed Securities UCITS III

12 Under The Bonnet

13 It’s all about the maths Using examples, this presentation aims to illustrate how seemingly complicated structured products can be decomposed into simpler component parts. Having determined the component parts of these sample products, the pricing parameters that determine the value of these component parts can then be explained

14 Funding Swap + Option GBP1.00 Investor’s Cash Share Price at Issue 100.00p Funding Swap75.00p Aggregate Costs 1.50p Option Premium23.50p GBP1.00 Funding Swap Option Providing Economic Return GBP0.75 Investor’s Cash Option Providing Economic Return

15 What determines Structured Product pricing? Two Price Components Zero Coupon Bond Price Interest rates Credit Option Price Volatility Time to expiry Spot price Strike price Dividends Interest rates

16 Volatility – It’s all about the bell curve!

17 Or in simple terms! High Implied Volatility Low Implied Volatility

18 Actual Pricing

19 TypeFTSES&PEurostoxxNikkei 100% PP75%58%68%44% 95% PP100%81%92%62% 50% soft170%120%158%64% Note: All GBP (hedged) with a 5yr term and assuming HSBC / SG PP – principal protection, 50% soft refers to a European KIP Participation Summary

20 Participation demand High interest rates Low option prices Strong market trend Income demand Low interest rates High option prices Weak market trend Participation Notes Twin-Win Autocallables / BRC’s We boil everything down to this

21 FTSES&PEurostoxxNikkei 9.5%8.4%9.5%5% GBP (hedged) 6 years, auto-call at 100%, 50% European KIP Standard Auto-Call Pricing Increase or decrease the risk / return profile?

22 Decreasing Risk / Return Defensive Autocallables single most popular structure over last 3 years Pick a return target and downside and work back with the auto-call barriers With lower rates the potential coupons (nominal returns) are lower (see handout) Some clients will to take a view on more than one market to boost returns

23 We don’t just do equity linked notes!

24 What we have on the go Bonds – clients have discussed hedging rising yields, playing the shape of the yield curve as well as simple cash enhancement (fixed-floating) Currencies – EM vs USD currency baskets potentially trading next week Commodities – not as popular as 2006/07 as rates low and many commodities in contango though there are some interesting ideas on gold

25 Secondary Market Derivative contracts are as liquid as their underlyings, which are in the main major market indices or stocks The value of the ‘package’ should reflect the fair value of the sum of the component parts, however, this may mean the investor gets back less than the amount invested Bid/offer should be 50bps either side of the fair price on mainstream assets All Structures are priced on a daily basis and these can be tracked on Bloomberg/ Reuters or via the www.catleylakeman.comwww.catleylakeman.com It is quite normal for structures to be traded prior to maturity or bought post launch Catley Lakeman can provide guidance as to how each trade will M2M during its life, given chosen inputs

26 Private Placement Structured Products are: No more complicated than equities and bonds Unique in their ability to precisely tailor your risk/return objectives Liquid and cost efficient Certain to deliver the results set out to your clients from outset

27 Disclaimer The information in this document is derived from sources believed to be reliable but which have not been independently verified. Catley Lakeman Securities makes no guarantee of its accuracy and completeness and is not responsible for errors of transmission of factual or analytical data, nor is it liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from publicly available sources or proprietary data. The opinions in this document constitute the present judgment of Catley Lakeman Securities, which is subject to change without notice. This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. This document is intended for the use of institutional and professional customers and is not intended for the use of private customers. This document is not intended for distribution in the United States of America or to US persons. This document is intended to be distributed in its entirety. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Catley Lakeman Securities is a LLP registered in England and Wales, Registered Office : One Eleven Edmund Street, Birmingham, B3 2HJ. Registration Number: OC336585, Vat Number: 936371705, FSA Reference: 484826


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