Fat tails on offer

9 May 2007 By Cyrus Sanati

Selling repackaged credit, commodity, and real estate risks to investors has made many bankers rich. Now they re eyeing currencies. Today s low currency volatility may make this a good bet. But investors should note: government foreign exchange policies can change fast.

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Barclays, JPMorgan and Merrill Lynch are among the firms working on collateralised foreign exchange obligations. These are similar to collateralised debt obligations but, instead of being backed by cash or synthetic credit obligations, they will be backed by foreign exchange.

A typical deal will contain about 20 currencies, according to Fitch. A series of trigger thresholds will be established between 2060% out of the money. If the currencies breach those thresholds, investors will lose principle.

The transactions will be divided into risky equity tranches and safer senior tranches. A tripleA rated slice might pay 1.5% over the risk free rate.

Bespoke CFXOs have already been sold on a limited basis. The first large, rated deal is expected in the next few months.

Fat tails on offer

9 May 2007

Selling repackaged credit, commodity and real estate risks to investors has made many bankers rich. Now they re eyeing currencies. Today s low currency volatility may make this a good bet. But investors should note: government foreign exchange policies can change fast.

This content is for Subscribers only

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