Structured notes: The power of research
The research efforts of banks is becoming increasingly important when it comes to developing new, competitive structured notes that will garner investor interest.
For example, Deutsche Bank put out research in August 2006 that asked investors to consider the possibility that a systematic trading strategy could be run in such a way as to harness the market returns, or beta, that the bank’s researchers say exists in the foreign exchange market.
Beta is often measured by a benchmark index for a given market, so the risk and return produced by the S&P 500, for example, is the beta returns for the US equity market. Transferring the concept of beta on to currency trading, however, presents a number of issues, mainly because the concept of value in foreign exchange purely comes down to how one currency moves in relation to another. Unlike in the equity and bond markets, where the investor holds securities that have an intrinsic value, a static currency holding has no such intrinsic worth. Rather, foreign exchange holdings can only have value if there is a trading process attached to them.
Deutsche Bank set out to create a systematic trading process that would single out a type of FX beta and consistently extract it from the market. The bank says beta does exist in currencies thanks to the fact that people participating in the market can have substantially different objectives and beliefs, while a number of market participants will not be maximizing profit – companies for example that have to change money as they operate across borders.