Euro structured products

I read with great interest your article last week on capital guaranteed short-term products. Rather than link the investment return to exchange rates, such as between USD and GBP, I would rather a product that pays a fixed coupon for every year (or period) that the euro rate of interest is between set parameters. This would be on the expectation, of course, to receive a higher rate of return than the bank rate, but always with a capital guarantee. Is this approach viable?

Such products are available and for various currencies, not just euro. They are, however, attractive in euro due to the very low rate of interest received on cash deposits, which are typically only 1-2%, depending on the amount you have on deposit and the term you commit for.

By linking the rate of return to an interest rate range, you are doing so on the expectation that interest rates are likely to remain stable or even fall. An example of how a product may work is as follows:

A fixed coupon of 4% is paid for every year that the three-month EURIBOR stays within the following prescribed range - year 1, up to 2.50%; year 2, up to 2.80%; year 3, up to 3.00%; year 4, up to 3.50%; and year 5, up to 3.70%.

This means that so long as the three-month rate of interest on the euro does not exceed 2.5% in the first year, then the investor receives a fixed coupon of 4%.

The same applies in the following four years but the euro rate can in fact go up to as high as 3.7% in the fifth year and still the full 4% coupon is received.

Bearing in mind the present three-month EURIBOR is around 2.1% and with the expectation of possible interest rate cuts, receiving 4% is attractive as it reflects nearly double the return, if not more than that received from bank deposits.

There is no risk to capital if the investment is held to maturity as there is a capital guarantee provided at maturity. The only risk is therefore that interest rates in fact increase and fall outside the prescribed ranges above.

In such a case, no coupon would be paid in any year that interest rates fall outside the range. The suitability of these products therefore depends on one's view on how interest rates will move over the period, e.g. five years.

In the case of the euro, I believe they will remain low. In the case of the US$, this is a different picture as interest rates continue to be aggressively increased.

If I were to invest in a US$ product as above, then I would want the interest ranges to be much wider and higher !

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.