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| BNP Paribas Emerging Balanced Note index | |
| Size | $30 million |
| Date | February 2011 |
| Structurer | BNP Paribas |
| return to the Global Deals of the Year index | |
The need for a change in approach to the new normal pervaded the markets last year from the largest deals to the smallest. BNP Paribas extended its reach in bespoke index products to address the changing priorities among its private banking clients. The Emerging Balanced Note that it developed for a Belgian private client last year was a direct answer to the changing demands of an increasingly sophisticated client base. “The client wanted a product invested in emerging markets so the key was to find the right underlying,” says Gilles Staquet, managing director and head of global equities and commodity derivatives sales at BNP Paribas in Brussels. “The easy option would have been to use a few market indices or to create a custom-built basket of stocks. But using funds was the best solution as they are dynamically managed by specialists.”
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Gilles Staquet, BNP Paribas |
The desire of the client to diversify its emerging market exposure led the bank to build it a bespoke emerging market index (as part of the bank’s My Index solution) composed of 10 funds: five invested in equities and five in local sovereign debt. The development of a custom-built index makes it far easier for the client to follow the evolution of the underlyings, which are hedged against the euro by being expressed in dollars. Not surprisingly a big concern was volatility, so the product incorporated a 10% risk-control feature to smooth any brutal market movement.
“Hedging volatility on a basket of funds is far more difficult than it is for stocks,” says Staquet. “The deal includes a volatility-control mechanism – the cost of the option is directly linked to the volatility of the underlying. BNP Paribas was able to be very aggressive on the price of the volatility option, which efficiently removes risk from the structure.”
Markets tend to be far more volatile on the way down than the way up, so a risk-control mechanism results in less exposure to the underlying if markets fall – an important consideration in 2011. “Recent market developments have been a good illustration of how volatility can evolve over time. Once you show how volatility can impact the option price it is easy to convince people to use a volatility control mechanism in the portfolio or add a volatility fund to the portfolio,” says Staquet. The result was a neat solution giving the client the exposure to the emerging markets that it wanted but efficient and cost-effective protection from volatile markets. “The key was not only the ability to price the option but the ability to deliver the whole solution,” says Staquet. “Access to the custom-built index makes this a product that it is easy for the client to understand.”
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Global markets Cargill Inc/The Mosaic Company |
| Glencore |
| Kinder Morgan |
| European Union |
| Rabobank |
| Crest Nicholson |
| BNP Paribas Emerging Balanced Note index |
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