Product performance


In this issue, we track products valued weekly, with the results shown along with the performance of the underlying asset. To define the terms for each product, all but one of the parameters was fixed and the remaining were calculated using index data as of the strike dateThe products are either principal protected, digital, accelerated growth or reverse convertibles.

We have chosen to look at a breakdown of the pricing of the Investec Capital Guaranteed FTSE 100 Plan, examining the quarterly option. Figure 1 shows the breakdown of the elements used to price the coupons, mainly the present value of the payments and the probability of not hitting the barrier. Rather than show all 20 quarterly coupons, the value of the coupons for each year using the average probabilities and the sum of the four payments is displayed.

Figure 2 follows the performance of a reverse convertible product linked to Coca-Cola. The product has a six-month term and a 50% barrier, which is based on daily closing levels of the underlying. The price of the spot does not fall by any more than 13.15% below its starting level, and therefore does not approach the barrier level of 50%. The price of the product is always above its starting level. This is because the barrier does not look likely to be hit at any time, which would put the capital at risk and the investor is receiving fixed coupons, consequently the net asset value (NAV) is above 100%.

Figure 3 plots the performance of the FTSE 100 and two product linked to the index. Both products are 100% capital protected and have a two-year term. The return of the first product (indicated in blue) is based on participation in the growth in the index. The second of the two products (indicated in green) is a digital product so the investor receieves a fixed return if the index is at or above its starting level at maturity. Since the start date of both products, the digital structure has had a higher net asset value than the participation product.

When the index is below the starting level the digital product will have a higher price as it only needs the index to recover to at least its starting level for the investor to make the fixed return. The participation product needs the index to rise above the initial level in order to make the same return. As the FTSE 100 recovers, the price of the two products becomes more similar. On the final valuation date (May 8, 2009) the products price at 106.58 (participation) and 107.18 (digital). If the index were to continue to rise during the product term the price of the participation product would at some point overtake the digital (where the investor can receive no more than the fixed payment).

The final of the three underlyings is the iShares MSCI EAFE fund. Figure 4 tracks the performance of the fund and of three two-year accelerated growth products linked to the fund. The first product has a gearing of 200% and a barrier at 50%, the second product has a gearing of 500% and a barrier at 50% and the final product has gearing of 500% and barrier at 70%. The price of the three products is reasonably similar throughout the observation period. The most obvious difference is that of the product with the barrier at 70%, which is significantly more sensitive to falls in the index and price than the other two when the underlying falls to its lowest point in the period - just over 20% from its initial level.

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