By Lehman Brothers.

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For this reason, Lehman Brothers has established a number of SPCs in both the Cayman Islands and the Channel Islands. We are also able to issue out of Gibraltar, the Netherlands, and Ireland. Other groups of investors may only be allowed to purchase loans or may prefer to make loans for regulatory or other reasons. Lehman Brothers has vehicles that enable investors to take exposure to a package of assets and/or derivatives by making a loan to the SPV, rather than by purchasing notes. The net economics to the investor are identical, but the regulatory treatment can be very different.

Investors can use credit spread options to take a view about credit spread volatility. One extension of the credit-spread option is the exchangeable asset swap option. This gives the purchaser the right but not the obligation to swap one asset swap package for another asset swap package linked to a different credit. This makes it possible for the purchaser of the option to take a view on the difference between two asset swap spreads. As the hedge fund market for credit spread products grows, we expect to see more growth and development of the credit spread option market.

Principal Protected Note If a credit event occurs before 2005, coupons terminate and the investor receives the principal redemption paid at the bond maturity 100% Note pays LIBOR plus 50 bp Credit Event 38 2005 Lehman Brothers International (Europe), March 2001 STRUCTURED CREDIT RESEARCH Figure 24. The Adjustable Redemption Principal Protected Structure (ARPPS). 1 Description 2010 A Credit Spread Option is an option contract in which the decision to exercise is based on the credit spread of the reference credit relative to some strike spread.

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