1 2 3 4 5 6 7 8 9 10 11

on the downside:
Long on a zero coupon bond of the
securitys maturity.
investors are exposed to three risks.
(1) Market (underlying
asset): Performance
depends on the uS-
DCnys returns and
volatility and resembles
a long call option strat-
egy on the upside.
(2) Credit (issuer
default): The note is
unsecured debt. Credit
risk is implied from the
value of the issuers corporate bonds
using z-spreads over risk-free rates. on
two-year debt, goldman Sachs had a
z-spread of 252.2 basis points on the
pricing date, Bloomberg data show. Z-
spreads for other issuers ranged from
50.3 basis points for Royal Bank of Can-
ada to 380.8 for Morgan Stanley. higher
z-spreads imply more risk of default and
lower the notes value.
(3) Liquidity: Structured products are
intended to be held until maturity, so the
secondary market is small. This note
hasnt traded since issuance, according to
Bloomberg data.
The value of each $1,000 note, at issu-
ance and on end-of-month dates since
then, is broken down in the table below,
using Bloomberg analytics. value of de-
rivatives indicates the fair market value of
the embedded derivatives. Model price
reflects the value of the derivatives, and
credit-adjusted model price adds credit
risk, based on z-spreads for traded bonds.
External levels are prices provided by
other sources, in this case Incapital.
Chandra Khandrika (ckhandrika1@bloomberg.net)
values structured notes for Bloomberg clients.
investors are snapping up structured
notes that bet on the Chinese yuan rising.
China has grown into the worlds
second-largest economy. its currency has
appreciated about 23 percent against the
u.S. dollar since 2005. Some economists
say the yuan has the potential to become
the next reserve currency.
Currently, banks can design yuan-linked
notes cheaply, owing to two factors.
First, the implied volatility of the ex-
change rate has declined. it has dropped
by more than 40 percent, to 4.1, since
Dec. 31 for two-year at-the-money op-
tions. Chinese policy makers seek a
stable currency to protect growth, as the
sovereign crisis in the euro region slows
economies around the globe.
Second, the euro-area crisis has in-
creased funding spreads for u.S. financial
stocks over the last year. Consequently,
the hypothetical zero coupon bonds used
in structured notes are cheaper.
on May 25, Goldman Sachs Group
Inc. priced $11 million of two-year, lever-
aged notes that pay 1.66 times any gains
in the u.S. dollar-Chi-
nese yuan exchange
rate (uSDCny). if the
yuan strengthens 20
percent, the return is
33.2 percent. The note
also protects against
declines. if the yuan
falls by 60 percent,
there is no loss.
The notes payoff can
be replicated using a European-style op-
tion on the underlying (for more details,
see chart) and a zero coupon bond.
on the upside:
Long on 1.66 call options at the initial
level of the uSDCny.
chinas economic growth attracts investors to Notes that bet on yuan Rising
decoNSTRUcTiNg The deaL anaLySiS By ChanDRa KhanDRiKa, DERivaTivES PRiCing SPECiaLiST
-40
-20
0
20
40
60
80
8.217 7.585 6.953 6.321 5.689 5.057 4.425 3.793
R
e
t
u
r
n

(
%
)

Underlying
Note
Payout Profile of Goldman Sachs Note
Exchange rate: U.S. dollars for yuan
Source: Bloomberg LP
For technical breakdown of
note, mouse-over circles,
starting here:
Interactive features not
viewable on IOS devices.
ThE NoTE
Bloomberg iD: EJ2083867
asset class: Currency
Principal protected: yes
issuer: goldman Sachs group inc.
underlying: uSDCny exchange rate
Maturity: Two years
upside participation: 166%
Trade Date: May 18, 2012
value of the Notes
daTe 5/18/12 5/31/12 6/29/12 7/31/12 8/31/12
Spot price (USDCNY exch. rate) 6.3282 6.3685 6.354 6.3617 6.3486
Embedded Derivative Value $3.889 $2.8621 $2.62 $1.8405 $1.5362
Model Price $1,003.89 $1,002.86 $1,002.62 $1,001.84 $1,001.54
Model Price (Credit Adjusted) $948.12 $946.47 $953.82 $965.67 $973.53
External Price Source (Incapital) NA NA $959.70 $961.41 $965.04
09.06.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes 3
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