Retrospective: Accelerated growth product linked to S&P 500

Investors were paid, as promised, by Credit Suisse’s 18-month, accelerated growth structured product. The yield is equivalent to an annual return of 11.6% for the S&P 500-linked investment

Credit Suisse issued an accelerated growth product linked to the S&P 500 index in March 2009 offering five times index growth at maturity subject to a cap on returns of 20%. Therefore the maximum return is achieved if the index rises by only 4% over the product term. The product had a 20% buffer, meaning that investors would not suffer loss to capital on the first 20% decline in the index. The 18-month investment matured on 20 September 2010.

The closing level of the index on the valuation date was 1141.2, which is 43% higher than its closing level on the strike date. Therefore, this product would have paid investors 120% of their initial investment - the maximum return due to the cap on returns: a 20% return for an 18-month long investment is equivalent to an annual return of 11.6%.

Figure 1 shows the performance of the index over the whole product term. The buffer and cap are also shown in relation to the level of the index on the strike date.

This product struck on a day where the S&P was at one of the lowest levels in the past five years. It was one of only 27 days in the five years prior to the strike date that the S&P has closed at 798 or lower. The lowest point of the index over the product term was the strike date.

At the time of pricing, the one-year implied volatility of the S&P 500 index was roughly 36%, significantly higher than its current level of approximately 22%. As is the case with most capital-at-risk products, a typical accelerated growth product should be able to offer more attractive terms in a more volatile environment, provided all other factors remain the same. The call spread on the upside of the product is not as sensitive to volatility as the downside of this product. Only 4% index growth (over the 18-month product term) is required to reach the cap which is low considering the volatility of the index and the maturity of the product.

A similar product linked to the same underlying, pricing on December 22, 2010 is offering a cap on returns of between 10-14%, it also has a lower gearing of just two times index growth. Products with a lower gearing should have a higher cap on returns if all the other terms are consistent. This demonstrates the effect of the underlying volatility on the potential returns of the index. Therefore even though this Credit Suisse product underperformed the index, investors were still able to achieve a decent return - more than if they bought a similar product today - due to the volatility of the underlying.

By placing a cap on returns, the issuer was able to offer the geared returns and 20% buffer which would both be appealing to an investor in this product.

This product type is the second most popular product type by both notional and issuance in the US at the moment. The use of the S&P-500 as an underlying for this product type is still widespread. At the time this product was scored it received a 9.18 for value score which is above the majority of product reviewed on structurededge.com. It is likely that the fact this style of product linked to this underlying is issued by so many providers the market is competitive and therefore the pricing is quite tight and the fees and costs kept down.

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