Risk Latte - Australian Dollar Bear Note

Australian Dollar Bear Note

Third Party Contribution
Apr 26, 2005

Recently an Australian bank offered the following AUD bear note to some of its large Asian Institutional clients. According to market info the note was very well received amongst some hedge fund managers who are bullish on the USD as well as those hedge fund managers who are looking to yield enhancement by switching to US Dollar assets in the short term.

For AUD-bears, this Note has a guaranteed coupon of 5.5% with a Knock-Out when total coupons reach 8.0%

Current Spot: 0.7802
Tenor: 6 years

Year 1: 5.50%
Year 2 – 6: (0.7802 - AUD/USD)* 100%, floored at zero (semi, 30/360)
                      subject to: sum of total coupons paid = TARGET(%)

TARGET: 8.00%

Early Redemption: 100 %, when sum of total coupons = TARGET (%) or more
Offer Price: 99.00%

Scenario Analysis

The attractiveness of this note lies in the fact that an actual coupon of only 2.5% is required after year 1 for the note to knock-out.

If AUD/USD depreciates to 0.7302 in 1.5 years (implying a coupon of 5% -- actual coupon is 2.5% since coupon period is 6 months), Note will redeem.

If AUD/USD depreciates to only 0.7552 in 1.5 years and stays there for an additional 6 months (implying an annual coupon of 2.5% for two coupon periods), the note will redeem.

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