FIMAT's Lewis Goldman and Leon Tatevossian help investors analyze knotty derivative trades.

By Margaret Elliott

Here's a tip for investors who have shied away from structured notes because they weren't sure they fully understood what they were buying.

Your headaches are over.

Call "do-it-yourself derivatives" and get the consulting services of seasoned marketers at the end of a phone line. Lewis Goldman, Leon Tatevossian and others in the financial products group have carved out a special niche for themselves at FIMAT-Société Générale, dispensing advice and execution to investors and corporate treasurers. In the New York office of this French-owned brokerage firm, the group pulls apart high-tech derivatives deals for their customers to see if they are well constructed-and, in some cases, whether they are well priced. "If we can do it at a better price, we will," says Goldman.

FIMAT has a unique birds-eye view of the derivatives market-better in some ways than any single dealer-because it tracks the daily activities of proprietary traders and other sophisticated players throughout the world. When an investor is offered a deal by a bank, the customer may not have the tools to analyze the trade fully, so FIMAT becomes an extension of the customer's analytics.

The challenge is particularly critical as derivatives become integrated with other financial markets. Tatevossian points out that these days agency issuers frequently combine debt with a swap overlay that reconfigures the liability. To understand whether the issue makes sense, the customer needs to look at the swap and volatility markets, not only at straight bond rates. That means understanding option theoretics and inter-market relative value. "We see trading opportunities-some very profound, some second-order-that should be relevant to investors as well as to proprietary traders," says Tatevossian.

"For example," he continues, "a salesperson from a major bank sells a highly structured floater to an investor as a leveraged play on rates. This is the strategic view. But does that salesperson take the customer through the second-order effects? What happens if there is a shift in short-term volatility? How do you assess swaption volatility versus cap volatility? Typically, only traders will consider these points. We examine these dimensions and can translate them into concepts an investor can understand."

One of the key ideas behind the FIMAT approach is trying to show the customer that there is more than one way to evaluate the trade. "Take a fairly complex floating rate note," says Goldman. "You should ask first, 'What is the duration and how sensitive is the price to changes in the shape of the curve?' But if you aren't a trader, you have to realize that this isn't an instrument you are going to sell tomorrow. In fact, you can't actually say what its characteristics are unless you look at it and model it under various time horizons. That is more revealing."

To get at the trade's true characteristics, FIMAT's analytics team may do several different simulations for its clients. Once that's complete, the group reviews the structure with the investor to ensure a full understanding of the risks and identify desirable modifications. Based on this examination, FIMAT is given the opportunity to execute the trade. "We hope credibility is established and they'll come back to us with another deal," says Goldman.

Recently FIMAT has been successfully marketing a two-year "Fed-policy" floating rate deposit with an embedded series of "chooser options." The investor sets an accrual band for LIBOR; when LIBOR is inside the band, the deposit pays an above-market floating coupon. If LIBOR falls outside the band, the deposit does not accrue interest. However, the strip of chooser options enables the investor to change the position of the band at any point during the life of the deposit. By offering the chance to fine-tune the interest rate view with one day's notice, Goldman and Tatevossian argue that this trade is the most user-friendly structure to date.

Of course, protection this flexible has a cost. But for portfolio managers burned by the earlier generation of range structures, the cost should be acceptable. A portfolio manager may wish to monetize the view that LIBOR is going to stay within a particular band, but not to the exclusion of all other views and with the ability to modify the expectation. Investors in the two-year trade typically buy eight to twelve choices. Goldman adds that because of the stability of rates recently, only one investor since June 1996 has changed the endpoints of the band. FIMAT is examining other wrinkles for the product, including a put attachment that gives an investor with options left as maturity approaches the ability to exchange remaining chooser options for additional bandwidth or extra coupon.

Tatevossian and Goldman describe themselves as both idea-driven and deal-driven. With the firm's emphasis on relative value, rather than outright price, and intensive use of modeling and quantitative analysis, this desk at FIMAT offers something new and different to investors in derivatives.

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