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Goldman Sachs

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Goldman issue new product to bet against the Japanese stock market.
Exchange-traded put warrants on Japan’s Nikkei 255 stock average
Public launch depends on the price of NPWs (Nikkei put warrants)

1987, BS issued currency warrants by GECC, heavily subscribed. Selling echange-listed currency warrants made three important impressions on GS team. 1. while investors were interested in puts on the yen, puts on the Nikkei would be much more widely demanded. 2. Profits to be made from buying options (sourcing volatility) in institutional markets and resell to retail customers 3. New markets could quickly become satiated. The prices of the currency warrants fell quickly from the initial deal levels
Exhibit 1 daily implied volatilities of exchange-listed yen currency warrants

1988, IFR reported the first of a series of recent Eurobonds whose redemption values at maturity were tied to the level of the Nikkei 225 stock average.

Exhibit 2 Representative Nikkei-Linked Euro-Yen offerings, Dec 1989

Exhibit 3 Hypothetical Nikkei-Linked Euro-Yen Transactions

Through a set of swaps, the issuer transformed its annual fixed-rate yen payments in to dollar-dominated LIBOR-based payments.

At maturity, the issuer would redeem the bonds from the investor a price tied to the Nikkei.
If Nikkei fell since the bonds were issued, the issuer would pay less than par to redeem the bonds.
Thus, it would be as if the issuer sold bonds with final principal payments at par but also bought a put option on the Nikkei maturing in the same years as the bond.
If the Nikkei fell, the put would rise in value, benefiting the issuer.

Usually, the issuer had no interest holding the embedded Nikkei put. But it could resell put options to financial intermediaries like Goldman by promising to deliver, at maturity, the difference between the bond’s par value and its

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