As the name implies, the principal exchange rate-linked securities are securities whose repayment of principal is linked to different foreign exchange rates, such as pound sterling or Deutsche Mark. Securities linked to the principal exchange rate are like bonds in every way. In fact, they are indeed bonds, but they are extremely strange bonds, because the behavior of such bonds is like betting on the exchange rate with financial leverage. It is issued by famous companies such as DuPont and General Electric Credit, and American institutions such as Fannie Mae and Salome, but it does not promise to repay the investor's principal at maturity, but promises to repay it by multiplying the principal amount by different foreign exchange multiples.
For example, if you pay 100 dollars to buy ordinary bonds, you should expect to get interest on the debt, plus 100 dollars to recover the principal at maturity. But if you buy securities linked to the principal exchange rate, you will find that you are wrong and outrageous. In fact, if you buy securities linked to the principal exchange rate and expect to recover the principal at maturity, you either don't know what you bought or you are a fool.
The principal exchange rate-linked securities are a kind of structured bills, specially designed bonds and derivative financial products that bring the most trouble to customers. If you have structured bills, you will not receive fixed interest and principal, and your interest or principal may be adjusted according to more than one complicated formula. If you haven't heard of structured bonds, wait and see. This bond is one of the largest and fastest growing markets in the world. It is estimated that the market size ranges from several hundred million to more than one trillion dollars, which is equivalent to nearly ten thousand dollars held by every working population in the United States.
Morgan Stanley's derivatives salesmen made millions of dollars by selling securities linked to the principal exchange rate to investors in the Middle East, Japan and even Wisconsin. Buyers include well-known enterprises, public funds, mysterious enterprises and wealthy individuals. The only thing these people have in common is that they all paid huge sums of money to Morgan Stanley, and many people lost amazing wealth on this commodity.
I found that there are roughly two kinds of buyers of major exchange rate-linked securities. I call them "liars" and "widows and orphans". If you are a salesman of derivative financial products eager to sell, both of them are good buyers. Most people who buy securities linked to the principal exchange rate are liars. They are very smart. They use securities linked to the principal exchange rate to engage in foreign exchange speculation in ways that other investors simply cannot imagine. People who are prohibited from participating in foreign exchange speculation by laws and regulations can also use the principal exchange rate-linked securities to engage in this kind of gambling, because the principal exchange rate-linked securities look like bonds, which masks the original gambling nature of investors. For example, there is a very popular principal-exchange-rate-linked securities. Instead of returning the principal of 100 to investors, it pays the principal of 100 by multiplying the change of the exchange rate of the US dollar, adding twice the change of the exchange rate of the British pound and subtracting twice the change of the exchange rate of the Swiss franc.
The repayment of principal is linked to these three currencies, so it is called principal exchange rate linked securities. If the exchange rates of these three currencies miraculously cooperate with each other to form a straight line-this is probably as rare as the eight planets in the solar system connecting in a straight line to form an eight-star alignment, you will get back a hundred dollars, no more or less. But you are more likely to receive other kinds of principal, and the amount depends on the changes of these three exchange rates. If you know what you bought, you will want your recovery to be much higher than 100, but you know that the recovery may also be much lower than 100. If the exchange rate of foreign currency fluctuates in the opposite direction, for example, the dollar and pound fluctuate in one direction and the Swiss franc fluctuates in the other, you may lose everything.
The sales staff of the development department used a suspicious and ingenious method to promote the securities linked to the principal exchange rate, boasting that investors' "downside risk is limited to the initial investment amount". This sentence, like a template, appears in all Morgan Stanley marketing documents, but it always makes the salesman snicker. There is an ironic selling point of the securities linked to the principal exchange rate, and many derivative financial products sold by my department later also have this selling point, that is, the buyer only loses everything at most.