In China, you can "fake" everything, even structured products.

Being that I do business in China, I think I’ve seen it all in terms of faked goods.  Fake Gucci bags, fake iPhones, you name it.  I think I even saw a fake BMW once.  But when I asked a treasury saleperson what he is selling most in China, his reply was “fake structured products”, even I was taken aback.  So I asked him more about it and found that it’s not really “fake” per se, but more like “fixed”.

The structure he was talking about is a Range Currency Deposit with the embedded USDCNY double no touch (DNT) option.  It has become one of the best selling structured products in China today

Firstly is because DNT are relatively simple option.  Asia classifies barrier options as “vanilla” and what the treasury sales are telling me is that products embeded with as FX accumulators and target redemptions were once selling like hot cakes, but now they are like kryptonite. 

Secondly, due to the collapse of Lehman, many Chinese investors are unwilling to leave their money in the banks for too long.  Very seldom do they invest anything beyond a 3M tenor.  So barrier option like a DNT is the right game to play.

But third and I think the best reason why DNT is so popular in China is because the Yuan, being a controlled currency, is very much predictable.  This is where the fixed or “fake” part comes in.  Given today’s economic conditions and China’s roadmap for growth one can predict, with pretty good accuracy, that the government will not let the Yuan fluctuate wildly, if at all.  It is like betting whether the car will go left or right, with the car’s signal on.

Here’s an example:  On a 3M USDCNY DNT product, an investor can make a 20% return at maturity setting the lower and higher trigger at 98% and 102% of spot.  We back test this structure and find that historically, over the past year, that chances that such structure will payout at maturity is nearly 100%!!