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Development of Synthetic Diamond Derivative Products. Vickie Flores, Adrian Mulryan Private Investor Products (“PIP”), Structured Products. Agenda. About structured derivative products and the addition of diamonds Development of a new derivative and structured product

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development of synthetic diamond derivative products

Development of Synthetic Diamond Derivative Products

Vickie Flores, Adrian Mulryan

Private Investor Products (“PIP”), Structured Products

agenda
Agenda
  • About structured derivative products and the addition of diamonds
  • Development of a new derivative and structured product
  • The contractual framework and legal issues
  • The role of diamond products in portfolio diversification
  • Recent examples, issues and developments
  • Further information
  • Questions?
about structured derivative products
About Structured Derivative Products
  • Synthetic investment instruments
  • Exchange traded and OTC
  • Cheaper and easier alternative to direct investment
  • Structured product types (performance tracking, yield enhancement, leverage, capital protection)
  • Wide range of structured product underlyings across all asset classes
who buys a structured product
Who Buys a Structured Product?

Who?

  • Individual retail investors
  • Corporate and commercial investors
  • Private Bankers
  • Asset Managers (to assist with asset allocation)
  • Financial Product Distributors/Advisors
why buy a structured product
Why Buy a Structured Product?

Why?

  • Access to otherwise inaccessible markets or pay offs
  • Portfolio diversification
  • Cost efficient for the investor
  • Tax efficiency or mitigation
  • Enhanced yield or protection
how diamonds would fit with the existing abn amro structured products range
How diamonds would fit with the existing ABN Amro structured products range
  • Proven demand for commodity and alternative underlyings from investors and asset allocators
  • Limited correlation with existing underlyings
  • New, exciting and previously inaccessible underlying
  • Removes the need for storage, insurance and security
  • Bullish view of diamond prices held by many
  • High profile in current financial press
problems in developing a structured product
Problems in Developing a Structured Product
  • Price transparency and agreed price sources
  • Standardisation of underlying assets (stones) and agreed valuation methodology
  • Identification of demand for rough vs polished diamonds
  • Disruption events

These same issues apply to developing a diamond derivative contract

requirements to develop a new derivatives contract
Requirements to develop a new Derivatives Contract
  • Willingness from market participants
  • Backing of financiers to the industry e.g. ABN Amro Bank NV for diamonds
  • Standardisation of documentation and delivery mechanism
  • Facilitator to standardise documentation e.g. ISDA
  • Working group of interested parties
  • Regular reporting to industry through existing mediums, trade press and web sites
characteristics and considerations for a derivative product
Characteristics and Considerations for a Derivative Product
  • 2 Distinct groups: OTC and Exchange Traded
  • 3 Major classes: Forwards/Futures, Options, Swaps

Considerations in developing of a Diamond Derivative Contract:

  • Contract terms and specification
  • Delivery mechanism – cash or physical settlement
  • Depository and verification by gemologist
  • Legal documentation (ISDA)
  • Direct settlement / central clearing (margining)
contractual framework
Contractual Framework
  • What is a Derivative?
  • ISDA
  • Master Agreements & Definitions
  • Benefits of Derivatives
  • Access to Derivatives
  • Types of Retail Structured Product
legal issues
Legal Issues
  • Challenges – Hedging – Polished vs. Rough
  • Timing
  • Product Types
  • Settlement
how synthetic diamond products can assist with portfolio diversification
How synthetic diamond products can assist with portfolio diversification
  • Historic traditional portfolios contained 3 asset classes (stocks, bonds and cash)
  • Benefits of portfolio diversification across asset classes increasingly recognised:
          • Maximised returns for minimised risk
          • Reduced volatility during both bull and bear markets
  • Full analysis required, but correlation with existing commodities expected to be fairly low
  • Increasing demand from investors for “alternative investments” not linked to bonds and stocks
  • Diamonds both a consumable and store-of-value asset so particularly suitable for portfolio diversification
recent examples and developments
Recent Examples and Developments
  • The Development of a Freight Derivative Contract
          • Established market (1744) based on trust
          • Lack of trade standardisation, transparency and pricing
          • Development of OTC Forward Freight Agreement (“FFA”) contract
          • Introduction of Central Clearing
          • Adoption of ISDA (2005)
          • Launch of NYMEX futures contract
          • Similarities and differences with Diamonds
          • Lessons that can be learnt from freight derivatives
  • Launch of Diamond fund on the LSE by Diapason (10th July 2007)
  • High profile recent press articles
further information on structured products
Further Information on Structured Products
  • ABN Amro Markets Web Site
    • http://www.abnamromarkets.com
  • Structured Retail Products
    • http://www.structuredretailproducts.com
questions
Questions
  • Any Questions?
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