Risk Latte - ICONs: How they Fell

ICONs: How they Fell

Rahul Bhattacharya
Mar 16, 2005

In the 1980s, Bankers Trust developed index currency option notes (ICONs), the earliest ancestors to the modern day range accrual notes. Essentially these were bonds in which the amount received by the holder at maturity varies with a foreign exchange rate.

Bankers Trust first issue of an ICON was for Long Term Credit Bank of Japan. The ICON specified that if the USD/JPY foreign exchange rate, S, is greater than 169 Yen per Dollar at maturity in 1995, the holder of the bond receives $1,000. If the Dollar-Yen exchange rate is below 84.50 then at maturity the holder receives nothing. If the Dollar-Yen rate is less than 169.00 Yen per Dollar but greater than 84.50 Yen per Dollar then at maturity the holder will receive a payoff (per unit of the bond) equal to:

1000 - Max {0, 1000(169/S - 1)}

Both Bankers Trust and Long Term Credit Bank of Japan were icons of the industry in those days.

In the mid to late eighties in the United States, Bankers Trust was the financial engineering powerhouse that was staffed by some of the brightest minds in finance and mathematics and which was responsible for so many modern day innovations in structured products.

Long Term Credit Bank of Japan was also in a way an icon in the Japanese banking industry in the mid to late eighties - lending to real estate companies with reckless abandon and doing precious little in terms of balance sheet risk management.

Both these icons - Bankers Trust and LTCBJ - met with spectacular decline in the 1990s and both fell into disrepute over credibility and ethical issues. Long Term Credit Bank of Japan was one of the two biggest bank failures of the twentieth century with Nippon Credit Bank being the other.

(References from John C. Hull and other web site resources).

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