Product performance
Comparing principal-protected, accelerated growth and reverse convertible products with June 2009 strike dates
The underlying assets for the three products reviewed in this issue have all risen over the past six months, and the effects can be seen when comparing index performance to the price of the product.
The first chart tracks the first six months of a five-year principal-protected product linked to the iShares MCSI Brazil Index Fund. The product offers upside participation on a one-to-one basis with no restriction on the maximum return at maturity. The underlying asset is an exchange-traded fund (ETF) that tracks the MSCI Brazil Index. The ETF rose quite sharply over the first six months, which has increased the product’s value. Principal-protected products tend to have relatively long tenor as a result of the need to buy a zero-coupon bond. More attractive upside options can be purchased on longer-dated products, including better participation or a higher cap.
The second chart displays the first six months of a two-year accelerated growth product linked to the SPDR S&P Homebuilders ETF. The product offers enhanced participation of five times index growth with no protection on the downside. As the chart illustrates, the value of the product is responsive to any movement in the spot price of the asset as the investor is exposed to market risk and participates in market growth. Increases in the asset are fairly correlative to increases in the product’s value. As returns are based on the final market level, rises in spot price will cause results in higher values closer to maturity as the probability of the product providing a return increases.
Chart 3 tracks a two-year reverse convertible linked to the stock of the Las Vegas Sands Corp. The product includes a 75% barrier based on closing day levels of the asset. As the chart illustrates, the price of this stock has risen enormously since the pricing date after dropping to almost 80% of its initial level a few weeks after the spot was taken. As the spot increases, the value also increases as breaching the barrier becomes less likely. However, the price begins to level off as the investor would not benefit from any rise in the index. Ideally, an investor purchasing a reverse convertible only needs the index to stay above the barrier for their investment to be safe whilst also receiving coupons. Investors believing the asset will rise significantly may want to have a direct holding in the stock; however, this provides no protection on the downside.
The table shows a pricing breakdown for the Barclays Bank accumulator product (page 42), which offers returns equal to FTSE 100 growth at the end of the six-year term, subject to a cap. The product has a lock-in feature, which means investors lock in returns if the index rises above any of the four levels (115%, 130%, 145% and 160%) during the product term. Capital is protected if any of the lock-in levels are hit, otherwise return of capital is subject to a knock-in barrier of 50%. The ‘base product’ component is the price of the product assuming no lock-in feature; this is the sum of a knock-in put at 50%, a call spread with cap of 60% and 100. The capital protection component is the value of locking-in the return of capital if the first lock-in level of 115% is hit at any time during the product term. The four lock-in components show the value of the feature at the four levels. The value decreases as the level gets higher and the probability of index reaching that level, and therefore locking in the returns, decreases. The value of all the lock-in components including the additional capital protection is 13.06.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Structured products
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Range accruals under spotlight as Taiwan prepares for FRTB
Taiwanese banks review viability of products offering options on long-dated rates
Structured products gain favour among Chinese enterprises
The Chinese government’s flagship national strategy for the advancement of regional connectivity – the Belt and Road Initiative – continues to encourage the outward expansion of Chinese state-owned enterprises (SOEs). Here, Guotai Junan International…
Structured notes – Transforming risk into opportunities
Global markets have experienced a period of extreme volatility in response to acute concerns over the economic impact of the Covid‑19 pandemic. Numerix explores what this means for traders, issuers, risk managers and investors as the structured products…
Structured products – Transforming risk into opportunities
The structured product market is one of the most dynamic and complex of all, offering a multitude of benefits to investors. But increased regulation, intense competition and heightened volatility have become the new normal in financial markets, creating…
Increased adoption and innovation are driving the structured products market
To help better understand the challenges and opportunities a range of firms face when operating in this business, the current trends and future of structured products, and how the digital evolution is impacting the market, Numerix’s Ilja Faerman, senior…
Structured products – The ART of risk transfer
Exploring the risk thrown up by autocallables has created a new family of structured products, offering diversification to investors while allowing their manufacturers room to extend their portfolios, writes Manvir Nijhar, co-head of equities and equity…
Most read
- As FCMs dwindle, regulators fear systemic risk
- Options market still searching for cause of the Vix plunge
- Top 10 op risks: AI fears drive cyber risk to record high