Morgan Stanley plans S&P buy-write securities, prices $9.9 million Dynamic Reference index-linked notes

By LLuvia Mares

New York, Dec. 4 - Market observers said Morgan Stanley's protected buy-write securities are a fascinating idea. The five-year securities are linked to the performance of the 2007-5 Dynamic Reference index, a benchmark linked to the S&P 500 index.

"Buy-write strategies are well known," said a market observer. "You buy the stock and sell it after the money call options, and then raise income. We thought this product was very interesting."

The index is a dynamic composite index that tracks the performance of hypothetical investments in two assets - 90% to 100% in the equity component, a buy-write strategy related to the S&P 500 index, and 0% to 10% in the zero-coupon bond component - and 0% in one liability, which is the leverage component.

The leverage component represents hypothetical borrowed funds that may, under certain circumstances, be used to leverage the allocation to the equity component.

The percentage allocations will be determined at pricing and will change over time based on the performance of the components.

The payout at maturity will be par of $10 plus any appreciation of the index over the threshold level. The initial index level is 97, and the threshold level is 100. Investors will receive at least par.

In addition, the securities will make monthly coupon payments based on the cash dividends of stocks in the S&P 500 and the premiums from the sale of hypothetical call options on the S&P 500 used in the buy-write strategy.

The target yield is 10%, but this level is not guaranteed and could be zero.

The notes are expected to price later this month.

Morgan Stanley's Dynamic Reference index notes

Similarly, Morgan Stanley also priced $9.9 million of five-year protected fund-linked securities linked to the performance of the 2007-3 Fund Dynamic Reference index.

The index is a dynamic composite index that tracks the performance of hypothetical investments in two assets - 90% to 100% in the class D shares of the Morgan Stanley FX Alpha Plus Strategy Portfolio, which is the equity component, and 0% to 10% in the zero-coupon bond component - and 0% in one liability, which is the leverage component.

The leverage component represents hypothetical borrowed funds that may, under certain circumstances, be used to leverage the allocation to the equity component in the index.

The percentage allocations are 90% in the equity component, 10% in the zero-coupon bond component and 0% in the leverage component. The allocations will change over time based on the performance of the components.

The payout at maturity will be par of $10 plus any appreciation of the index over the threshold level. The initial index level is 97, and the threshold level is 100. Investors will receive at least par.

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