Personal Finance: Discovering derivatives

THE Business Expansion Scheme is proving an interesting training ground for expanding the horizons of investors.

We have become almost familiar with returns based on the performance of the

FT-SE 100 being offered by BES and building society bonds, where the higher the index, the higher the returns.

That seems almost natural.

But what delivers the returns is far from 'natural'. The synthetic financial instruments that rely on dealers buying and selling futures and options could just as easily deliver returns with an inverse relationship to the performance of real shares.

We have also become familiar with fixed-rate mortgages. But the latest BES wheeze is a return that depends on interest rates - the higher the rates climb, the higher the return on the BES investment after five years.

The Bessa Lincoln College is being set up by Close Brothers to raise money for the Oxford college. Each pounds 1 share (which qualifies for full tax relief, so costs a higher- rate taxpayer 60p and a basic- rate payer 75p) will be worth a set 80p at the end of five years. The extra returns come when three-month Libor - the rate at which banks lend to each other (currently around 5.75 per cent) - rises. If it rose to 9.75 per cent for the entire five years, the return would be boosted by 40p a share.

The mechanics are being managed by an Abbey National subsidiary, Abbey National Baring Derivatives. Abbey has a well-honed treasury department which has served it well on the fixed mortgages front, and will be well-placed to give Abbey an edge when the wider world is prepared to go deeper into derivative-based investment packages.

The BES marketing blurb says it is suitable for those who have variable-rate mortgages or loans and want to damp down the risk of rising interest rates.

A one-off return in five years' time partially pegged to interest rates is an imperfect hedge against rocketing interest rates. But this is just the sort of investment that might give people the feel, and the appetite, to go deeper into synthetic investments which can help them to manage their exposure to interest rates, the stock market in general or even particular stocks.

For information on the BES call 071-600 5556

THE Cheltenham & Gloucester Building Society is a jolly smart outfit, often one step ahead of the pack.

It was the pioneer of postal savings accounts and has led the way in no longer selling life insurance.

But that doesn't necessarily mean that it cannot sell mortgages with free life insurance thrown in.

Which it does with the Freelife mortgage, which is a repayment loan with a variable interest rate currently at the standard 7.99 per cent. C&G has bought a block policy, and all but the walking wounded or those with grim medical times just behind them can sign up.

So has C&G really stopped selling life insurance?

Many borrowers with the minimum 10 per cent deposit will be willing to take the mortgage with free cover rather than the one-year 2 per cent discount, that C&G offers on its standard repayment loan.

AUCTION rooms where icons of the art world come under the hammer for hundreds of thousands of pounds are places to be seen.

The auctions where life policies are sold are rather a contrast. Buyers look almost furtive about buying a policy that will pay only if the original policyholder dies, not the new owner.

So it is rather surprising that Foster & Cranfield has decided to hold an evening auction on 25 November with wine and buffet to follow.

Perhaps it hopes to bring the buyers of second-hand policies out of the shadows.