New Investment Ideas

There are three new notes for you:


3Y USD, 100% KG on USD CMS Spread 10Y-2Y, 2.50% p.a. guaranteed, 3.20x leveraged

The difference between the yield on the benchmark 10-year and 2-year Treasury note recently inverted amid the trade war and growth concerns (yield spread is seen by many investors as a tool to forecast the probability of future recessions and rebounds). The spread 10Y-2Y hit its lowest level since 1989 when it was at -0.59%

The below strategy allows qualified investors to benefit from a fixed coupon over a short period whatever happens to the spread. To optimise the results of the floating leveraged coupon, the spread should go back to positive level after this short period. Investors' fear of an economic downturn is growing, Fed is under pressure to restore confidence by cutting interest rates. Such a move could restore confidence over a year as seen in 1989 and 2000, helping the 10Y-2Y spread to widen again. Qualified investors having such a view could optimise this strategy with a 1-year fixed coupon and a floating leveraged coupon thereafter

In 2007 the Fed ignored the inversion’s warning. Qualified investors having more concerns about the ability of the Fed to respond to this recent move could consider this strategy with a 2-year fixed coupon and a floating leveraged coupon thereafter. The below strategy allows qualified investors to benefit from a 2.50% p.a. guaranteed coupon paid quarterly over the 1st year, then a floating leveraged coupon of 3.20x annualized on USD CMS Spread 10Y-2Y paid quarterly (floored at 0%, without cap). This product is 100% capital guaranteed at maturity

Product Parameters

Issuer rating AA- (rated by S&P)
Currency USD
Maturity 3 Years
Exposure : USD CMS Spread 10Y-2Y(Ref: -0.0921%)
Frequency: Quarterly
Guaranteed Coupon (Q1-Q4): 2.50% p.a. over the 1st year
Coupon leveraged (Q5-Q12): 3.20 * USD CMS Spread (quarterly fixing in advance, floor 0%, no cap, 30/360)
At maturity: 100% capital guaranteed
Pricing date: 14/08/2019
Investor Profile: Bullish/Neutral sophisticated

Mechanism

In any case qualified investors will get a 2.50% p.a. guaranteed coupon over the first year, paid quarterly

Scenario 1:On Q5, USD CMS Spread 10Y-2Y is at +0.70%
Payoff: Qualified investors get 0.56% coupon (3.20 * 0.70% p.a.). Product continues

Scenario 2: On Q8, USD CMS Spread 10Y-2Y is at -0.20%
Payoff: No coupon paid. Product continues

Scenario 3: At maturity, USD CMS Spread 10Y-2Y is at +1.50%
Payoff: Qualified investors get 100% capital back + 1.20% coupon (3.20 * 1.50% p.a.). Final return = 100% capital back + 1.20% p.a. guaranteed coupon + Leveraged coupons paid quarterly over the last 2 years

Scenario 4: At maturity, USD CMS Spread 10Y-2Y is at -0.05%
Payoff: Qualified investors get 100% capital back, no coupon paid. Final return = 100% capital back + 2.50% p.a. guaranteed coupon + Leveraged coupons paid quarterly over the last 2 years

The following graph represents the performance of the underlyings over the last 5 years:

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3mth USD, 3.00x Leveraged Certificates

Leveraged Certificates allow qualified investors to either invest in markets with a directional view (without the effect of volatility and time value) or hedge a particular position

Investment idea: Bullish Leveraged Certificate on the CBOE S&P500 Volatility Index (VIX Sept19). The CBOE S&P 500 Volatility Index is based on real-time prices of options on the S&P 500 Index, listed on the Chicago Board Options Exchange, and is designed to reflect investors' consensus view of future (30-day) expected stock market volatility.

In a time of growth concerns, volatility tends to increase. Regarding the future outlook of global economics, qualified investors may think that the uncertainty will increase: outcome of the trade war, Brexit, inverted yield curve are such events will allow the VIX to increase over the next months. Qualified investors could wait until the VIX goes back to its average of 15.15 (over the 5 past years) or below to benefit from a good entry point

Product Parameters

Issuer rating A2 (rated by S&P)
Currency USD
Maturity 3 Months
Pricing Date: 16/08/2019
Investor Profile: Neutral sophisticated

Mechanism

Positive scenario: VIX Sept19 increased by 10% (USD 21.49). Value of the Certificate is now USD 8.3900 (+28.85%)


Neutral scenario: VIX Sept19 remain unchanged (USD 19.54). Value of the Certificate is still USD 6.5117 (+0.00%)


Negative scenario: VIX Sept19 decreased by 10% (USD 17.58). Value of the Certificate is now USD 4.4900 (-31.05%)


See below Leveraged Certificates on other underlyings:

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5Y USD, CLN on Republic of Italy, 4.05% p.a. guaranteed

Matteo Salvini, Deputy Prime Minister of Italy intended to recall parliament from its summer break for a vote of no confidence. As a result, the Italian debt was under pressure. The 5-year Italian CDS Spread yield increased by 12.93% on the 09th of August (+28% from the 1st of August). The Senate opted to calm the political turmoil by rescheduling the no confidence vote to the 20th of August 2019 in response to the crisis facing the government: Prime Minister Conte may choose to resign if he loses the no confidence vote.

This strategy is suitable for qualified investors willing to benefit from the current high level of the Italian CDS. For the others, waiting for the 20th August, depending on the outcome of the vote, could allow another spike in Italian 5Y Spread and allow qualified invertors to benefit from another good entry point.

Note that Italy avoided a credit downgrade from Fitch Ratings and maintained its rating BBB

This strategy allows qualified investors to benefit from a 4.05% p.a. guaranteed coupon unless credit event, paid quarterly and offers exposure to the creditworthiness of Republic of Italy. Capital is guaranteed if no credit event occurs (such as bankruptcy, obligation default, failure to pay and restructuring)

Product Parameters

Issuer rating A(rated by S&P)
Currency USD
Maturity 5 Years
Exposure: Republic of Italy (BBB, rated by S&P)(ITALY CDS USD SR 5Y D14, i.e. 217.635)
Coupon Payment: Quarterly
Guaranteed Coupon: 4.05% p.a., 30/360, up to credit event
Market Recovery: Floating (determined by ISDA)
Pricing Date: 09/08/2019
Investor Profile: Neutral sophisticated

Mechanism

Scenario 1: In Y2, no credit event occurred
Payoff: Qualified investors get 4.05% coupon. Investment continues

Scenario 2: At maturity, no credit event occurred
Payoff: Qualified investors get 100% capital back + 4.05% coupon = 104.05%

Scenario 3: At maturity, a credit event occurred
Payoff: Market recovery determined by ISDA. No coupon paid

Credit Event: If a credit event occurs, further coupons are forgone and the CLN will redeem at the final auction settlement price determined by International Swaps and Derivatives Association (ISDA: www.isda.org)


The following graph represents the spread between underlyings over the last 5 years:

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