Deutsche, JPMorgan link to U.S. Oil Fund; volatility, tracking efficiency are draws, distributor says

By Kenneth Lim

Boston, Feb. 25 - Issuers who have been linking structured products to United States Oil Fund, LP are doing so because of the fund's high volatility and its effectiveness in tracking oil prices, a distributor said.

Deutsche Bank AG, through its London Branch, was the latest to offer a product linked to the exchange-traded fund.

Deutsche plans to price zero-coupon barrier bonus securities due March 16, 2011 linked to the U.S. Oil Fund.

If the fund never closes below 55% of its initial level during the life of the notes, investors at maturity will receive the greater of 140% of par or par plus the fund return, subject to a maximum total payout of 160% to 180% of the principal. The exact cap will be set at pricing.

If the fund closes below 55% during the life of the notes, investors at maturity will receive par plus the fund return.

A day earlier, JPMorgan Chase & Co. launched 10.25% reverse exchangeable notes due Feb. 26, 2010 linked to the common stock of the U.S. Oil Fund.

Payout at maturity will be par unless the fund falls by more than 50% during the life of the notes and finishes below the initial share price, in which case investors will receive a number of shares equal to $1,000 divided by the initial share price or, at JPMorgan's option, the equivalent value in cash.

Royal Bank of Canada on Tuesday priced $5.672 million of buffered bullish digital notes due March 29, 2010 linked to the fund.

At maturity, if the fund finishes above $24.44, investors will receive par plus 24% of their principal. If the fund finishes flat or does not decline to below $19.55, investors will receive par. Investors will lose 1% for every 1% that the fund finishes below $19.55.

Volatile opportunities

The underlying fund is highly volatile at the moment, the distributor said.

"It's a volatile asset at the moment, which means two things," the distributor said. "One, from a risk perspective, if you have buffers or barriers, there's a higher risk that those buffers or barriers will be breached. But at the same time, it also means that you can get much more attractive terms from issuers because it costs them less to offer you this option."

Those terms will be seen as opportunities by certain investors, the distributor said.

"If an investor has done sufficient research and has a view on the fund that is represented by a structured product, that structured product would be very attractive at this time because the investor is likely to potentially get better returns than if the fund was less volatile," the distributor said.

Efficient underlying

Linking to the fund is also a reflection of its effectiveness in tracking the price of oil, the distributor said.

"The objective is to offer investors who want to bet on the price of oil, offer them an alternative to actually going out and buying contracts or options or buying the fund itself," the distributor said.

"You want to have an underlying that does a good job of tracking the price of oil, because that's what the investors ultimately want to invest in. An ETF does a relatively good job of this because it's exchange traded and the pricing is quite transparent. And it's a fund that many investors who want to invest in oil, they already understand it and it's easy to model."

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