Institutional Structured Products
description
Transcript of Institutional Structured Products
Institutional Structured ProductsAugust 2013
Agenda
Catley Lakeman Securities / Counterparty Risk
How are Structured Products put together?
Key Categories of Structured Product
How do they fit into client portfolios?
Costs / Liquidity
Why Use Structured Investments?
Appendix
2
Catley Lakeman Securities / Counterparty Risk
3
Catley Lakeman Securities
Founded July 2008 Team of 9 Combined investment sales experience – 42 years Combined structured investment trading experience – 34 years Combined structured investment specific experience – 54 years
STUART CHANDLER
Non-Executive Chairman
RUSSELL CATLEY(Partner)
ANDREW LAKEMAN(Partner)
NINA GILL GEORGE HICKEY
Sales Sales Sales & Research Sales
T 020 7043 0101M 07977 917 238
T 020 7043 0102M 07812 527 172
T 020 7043 0104M 07974 990 280
T 020 7043 0107M 07974 916 971
TOM MAY(Partner) CHRIS DAGG JONATHAN DAGG
Trading & Structuring Trading & Structuring Trading & Research
T 020 7043 0103M 07876 716 067
T 020 7043 0105M 07841 332 701
T 020 7043 0505M 07921 003 583
4
EDWARD SENIOR
Delta 1
T 020 3397 3156M 07971 958 585
FSA authorised securities and futures firm
Outsourced origination and distribution business, representing seven banks on a contractual basis
Sell and support (ie in both the primary and secondary markets) private placement securitised derivative investments to professional asset managers and institutions in the UK
5
Counterparty Risk
Source: Bloomberg, data as at 26-July-2013
Royal
Bank o
f Can
ada
JP M
organ
Rabob
ank
UBSHSBC
Credit S
uisse
Citigrou
p
Deutsc
he Ban
kBoA IN
G
Goldman
BNP
Barclay
s
Nomura
Lloyd
s TSB
Morgan
Stanley
Commerz
bank
Soc G
en
Credit A
grico
leRBS
Banco
Santan
der
0
100
200
300
400
500
600
700
Credit Spreads since June-2008 - Trading Ranges
Cre
dit D
efau
lt Sw
ap (C
DS)
leve
ls [b
asis
poi
nts
over
LIB
OR
per
ann
um]
high
low
maximum 1360
current
How are Structured Products Put Together?
6
A structured product is a defined-return investment based on the performance of an underlying asset
Factors to determine at the outset:
o Underlying asset – equity indices, commodities, interest rates, etc
o Payoff – depends on your investment view, the risk/ return profile, income vs growth
o Counterparty – mark-to-market considerations, diversification of issuers
What are Structured Products?
7
8
Estimation of 170% Barclays 5 year FTSE Accelerator Bond (Traded 1-March-2005):
Matured at 117p (estimate)
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 74.61p
Aggregate Costs 1.49p
Amount to invest 23.9p
Price of 1 call option at March 2005 14.06p
Therefore with 23.9p, investor can buy 1.7x call options→ 170% participation
Capital Protected FTSEBack in 2005
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash
9
Indication of the same 5 year capital protected participation structure today, with an AA- rated issuer:
Hence why these structures are not traded today in the current pricing environment
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 90.04p
Aggregate Costs 1.49p
Amount to invest 8.47p
Price of 1 call option today 12.04p
Therefore with 8.47p, investor can buy 0.70x call options→ 70% participation
Capital Protected FTSE Today
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash
10
Selling FTSE downside does look good today. Indication of a 5 year structure today with soft capital protection at 60%, with an AA- rated issuer:
These structures can be a good alternative to passive or quasi-passive long only funds
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash Sell 5yr European
Put Option on the FTSE Risk At 60%
Strike (‘Knock-In Put’)
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 90.04p
Aggregate Costs 1.49p
Old amount to invest 8.47p
Sell put risk premium 13.91p
New Amount to invest 22.38p
Price of 1 call option today 12.04p
Therefore with 22.38p, investor can buy 1.85x call options→ 185% participation
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
Partly Capital Protected FTSE Today
11
How would this have looked in 2005? Estimation of a 5 year structure with soft capital protection at 60%, AA- rated issuer:
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash Sell 5yr European
Put Option on the FTSE Risk At 60%
Strike (‘Knock-In Put’)
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 73.79p
Aggregate Costs 1.49p
Old amount to invest 24.72p
Sell put risk premium 4.04p
New Amount to invest 28.76p
Price of 1 call option at March 2005 14.60p
Therefore with 28.76p, investor can buy 2.05x call options→ 205% participation
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
Partly Capital Protected FTSE Back in 2005
Key Categories
1. Accelerators / Supertrackers
2. Defensive Autocalls
3. Range Accruals
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Categories of Structured Products
CAPPED
UNCAPPED
ACCESS TO A PARTICULAR UNDERLYING
PARTICIPATION
SELLING VOLATILITY
DEFINED RETURN
YIELD ENHANCEMENT
AUTOCALLS
SYNTHETICS
INCOME Sit alongside: Income funds
Sit alongside: ZDPs
Sit alongside: Equity income funds and absolute return funds
Sit alongside: Large cap / core long only funds and ETFs
Sit alongside: Other vehicles accessing the same underlying asset
AcceleratorsSupertrackers Call Spreads
Usually participation in the form of an Accelerator, (but not always)
Autocalls Defensive Autocalls Worst-Of Autocalls
Synthetic ZerosDigitalsRange TradesRange Accruals
Reverse Convertibles DigitalsRange Trades High Income Range AccrualsInflation Plus
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1. Accelerators / Supertrackers
2. Range Accruals
3. Defensive Autocalls
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Construction
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• HSBC 5.5 year Fixed Rate Bond
• Yielding roughly 3.3% per annum at time of issue
• Remove coupons
• Present Value of coupon stream over 5.5 years: 17p
• Left with an HSBC zero coupon bond worth 83p
• Incorporate ‘soft protection’
• 60% soft protection on S&P 500 at maturity
• Sell knock-in put: 12.5p
• Incorporate upside
• 100 – 83 + 12.5 = 29.5p to spend
• 1 S&P call option is 16.5p; 29.5 / 16.5 = 1.79 call options
HSBC 5.5 year Fixed Rate Bond
Remove Coupons
Incorporate ‘soft protection’
Incorporate upside
All data as at time of issuance (Feb-11)
Eg: HSBC 340 US Supertracker (179%)
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HSBC 340 US Supertracker (179%)
Strike: 16-Feb-11
Counterparty: HSBC
Currency: USD Denominated
Underlying: S&P 500 (1336.32 points)
Maximum Term: 6 years
Platform: EIS (subject to CGT under current tax rules)
Upside: 179% participation (final year averaging)
Downside (60% European Knock-In Put):
if at maturity the S&P has fallen by more than 40% of the initial level (below 801.79 points) at maturity, the structure will redeem paying the original capital minus 1% for every 1% the Index has fallen below the initial level
Mark-to-Market
17Source: Bloomberg, data to 29-July-13
Feb-11 May-11 Sep-11 Dec-11 Mar-12 Jun-12 Oct-12 Jan-13 Apr-1375%
85%
95%
105%
115%
125%
135%
145%S&P 500 Index Performance [Price]
US Supertracker Per-formance
Total return of index = 131.56% (dividend reinvestment assuming Net of Corporate Tax rate 20%)
Structure performance to date: 39.37%
S&P TR performance to date: 31.56%
Structure annualised volatility: 20.82%
S&P annualised volatility: 18.08%
Performance
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• Since launch performance: 29.35% versus 18.20% sector average in the below list of funds
Source: Bloomberg, Financial Express, data to 17-June-13
USD Denominated Performance (TR) Bloomberg Ticker 1 month 3 month 1 year Since Launch (16-Feb-11) (16-May-13) (15-Mar-13) (12-Jun-12)
UBS US Equity Investment Funds UBSUEAA LN -0.38% 6.66% 30.72% 20.84%
Legg Mason Funds US Equity LMUSEAA LN -0.49% 5.55% 29.12% 15.87%
JPMorgan American Investment Trust JAM LN -0.53% 6.67% 26.04% 21.31%
Brown Advisory US Equity Growth Fund BRAUSEB ID -0.57% 2.83% 21.91% 18.04%
JPM US Equity Income HLIEX US Equity -0.77% 5.82% 25.99% 35.75%
Schroder QEP US Core Fund SCHRAMA LN Equity -0.81% 6.28% 27.01% 27.53%
S&P 500 SPX -1.30% 4.66% 25.13% 26.83%
ISHARES S&P 500 SACC LN -1.52% 4.98% 25.67% 26.49%
HSBC 476 US Supertracker Series 5 B92SVS9 -1.93% 8.02% N/A N/A
M&G Investment Funds American MGAMDAA LN -2.17% 3.06% 25.26% 15.76%
HSBC US Supertracker Series 2 / 3 / 4 B3Z2023 -2.23% 9.33% 34.16% 33.42%
Findlay Park American Fund FINDLPI ID -2.84% 1.92% 26.71% 24.77%
Threadneedle Investment Funds American Select TDNASGA LN -2.85% 2.45% 23.08% 22.92%
Neptune Investment Funds US Opps CFNUSAA LN -3.44% 4.03% 26.69% 14.12%
Source: Bloomberg, Financial Express, data to 17-Jun-2013
How do they fit into client portfolios?
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USE TYPE EXAMPLE SITS ALONGSIDE
Gearing / Participation Uncapped Accelerator / Supertracker Large cap / core long only funds and ETFs
• Seen by many as a cost-effective ETF replacement
• Given 90% of respondents to the 2012 questionnaire were bullish, it is likely we will
see more of these structures over the next year
• Not usually held for more than 1 to 2 years
1. Accelerators / Supertrackers
2. Defensive Autocalls
3. Range Accruals
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Payoff Example
Level of Index 1st anniversary 2nd anniversary 3rd anniversary 4th anniversary 5th anniversary
100%
60%
0%
6th anniversary
Autocall observation coupon of 32%
Autocall observation coupon of 40%
Autocall observation coupon of 48%
Autocall observation coupon of 24%
Autocall continues to 2nd anniversary
Autocall continues to 3rd anniversary
Autocall continues to 4th anniversary
Autocall continues to 5th anniversary
Autocall continues to 6th anniversary
Capital protection barrier triggered
Capi
tal P
rote
cted
Capi
tal L
oss
Autocall observation coupon of 16%
Autocall observation coupon of 8%
100%95%
90%85%
80% 75%
Autocall redeems at 100p
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Eg: HSBC 260 FTSE Defensive Autocall (10%)
HSBC 260 FTSE Defensive Autocall (10%) EIS
Strike: 7-Oct-10Counterparty: HSBC Currency: GBP DenominatedUnderlying: FTSE 100 (5662.13 points) Maximum Term: 6 years Platform: EIS (subject to CGT under current tax rules)Upside: Defensive autocall, 10% snowballing annual coupon
Autocall Barriers:
Year 1: 100% barrier 110% payoffYear 2: 100% barrier 120% payoffYear 3: 100% barrier 130% payoffYear 4: 95% barrier 140% payoffYear 5: 90% barrier 150% payoffYear 6: 85% barrier 160% payoff
Downside (50% American Knock-In Put):
should the structure not autocall on any of the 6 anniversaries, and the FTSE has fallen by more than 50% at any close over the life, the structure will redeem paying the original capital minus 1% for every 1% the Index had fallen below strike level
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Payoff
Unless the capital protection has previously been breached
Level of FTSE 1st anniversary 2nd anniversary 3rd anniversary 4th anniversary 5th anniversary
100%
50%
0%
6th anniversary
100%
Autocall observation coupon of 40%
Autocall observation coupon of 50%
Autocall observation coupon of 60%
Autocall observation coupon of 30%
Autocall continues to 2nd anniversary
Autocall continues to 3rd anniversary
Autocall continues to 4th anniversary
Autocall continues to 5th anniversary
Autocall continues to 6th anniversary
Capital protection barrier triggered
Capi
tal P
rote
cted
Capi
tal L
oss
Autocall observation coupon of 20%
Autocall observation coupon of 10%
100% 100% 100%95%
90%85%
Autocall redeems at 100p*
Autocall continues to 2nd anniversary
Capital protection barrier
Autocall continues to 3rdanniversary
Capital protection barrier
Autocall continues to 4th anniversary
Capital protection barrier
Autocall continues to 5th anniversary
Capital protection barrier
Autocall continues to 6th anniversary
Capital protection barrier
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Oct-10 Feb-11 May-11 Aug-11 Dec-11 Mar-12 Jun-12 Sep-12
-15
-10
-5
0
5
10
15
20
25FTSE 100 Total ReturnHSBC 260 FTSE Defensive
Annualised Volatility over the life of the trade: HSBC 260: 14.51% FTSE 100: 19.93%
Outperformance over the Underlying: 9.77%
Total return of index = +10.23% (dividend reinvestment assuming Net of Corporate Tax rate 20%)
Mark-to-Market
Structure outperformance to date: 9.77%
Structure annualised volatility: 14.51%
FTSE 100 annualised volatility: 19.93%
Source: A selection of popular UK funds, all rated AAA/AA by Citywire 25
• Called in Year 2 (8th October 2012), with the FTSE at 5841.74 points
• Over the two years since launch, the structure doubled the return of the market with less volatility
Period Range: 7-Oct-10 to 8-Oct-12
Total Return Performance 360 Day Volatility
Structure (HSBC 260 Def Ac) 20.00% 14.51%
BlackRock UK Special Situations 16.70% 19.92%
Threadneedle UK Equity Income 15.79% 17.49%
Underlying (FTSE 100) 10.23% 19.93%
M&G Recovery 11.14% 22.56%
Standard Life Investment GARS 7.62% 4.72%
Jupiter Absolute Return 4.51% 5.51%
Performance
How do they fit into client portfolios?
26
• Performance of Defensive Autocallables is predictable and defined
• Bull market: Underperform
• Bear market: Likely to outperform
• “Flattish” market: Outperform significantly
• Autocall Backtest Analysis – illustrating where outperformance tends to occur
USE TYPE EXAMPLE SITS ALONGSIDE
Yield Enhancement Defined Return Selling Volatilty
Autocalls Defensive Autocall Equity income finds and absolute return funds
Costs & liquidity
27
Cost/Fee structure of Institutional Structured Investmentso Costs typically between 0.5% to 2.0%
How liquid are Institutional Structured Investments? Can I buy and sell them?
o Full Intra-day secondary market liquidity
o Institutional structured investment s will price intra-day
o Liquidity has existed on every single trading day for the entirety of the Institutional Market (i.e. over the last ten years, encompassing the Financial Crisis)
o Liquidity exists at the level of the underlying they are referenced to.
o For example, examine the liquidity of S&P 500 or FTSE 100 futures.o Consider for example volume traded on S&P 500 futures – current average for the last
weeks trading is $106.8Bil per day * *Source: JP Morgan Global Equity Derivatives & Delta One Strategy 26th July 2013
Cost and Liquidity of Institutional Structured Investments
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Summary
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Why use Structured Investments in a portfolio?
o They can be tailored to an investors’ specific requirements
o They offer an investor access to a wide variety of underlyings (equities, indices, interest rates, inflation, commodities etc)
o They can be structured via a variety of different outcomes at maturity, that are generally very simple to understand
o They tend to do ‘exactly what it says on the tin’- both the returns and the risks are easily definable
o As are the costs
o They should be used as an active investment, which is facilitated by a liquid secondary market (they have proved to be almost the most liquid asset you can hold) that CLS services
Why Use Institutional Structured Investments?
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31
Appendix
Appendix: Market Colour Data
32
Rates, Credit and Volatility
Sterling Interest RatesGrinding lower, 10% autocall coupon equates to 15% in 2007 (ceteris paribus)
Source: Bloomberg (29-July-2013)
Nov-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2 year currently 0.69%!
5 year currently 1.38%!
GBP Swap Rates
Swap
Rat
e (%
)
Appendix: Market Colour Data
33
Rates, Credit and Volatility
CreditClients continue to chase quality
Source: Bloomberg (29-July-2013)
Royal
Bank o
f Can
ada
JP M
organ
Rabob
ank
UBSHSBC
Credit S
uisse
Citigrou
pBoA
Deutsc
he Ban
kIN
G
Goldman
BNP
Barclay
s
Morgan
Stanley
Nomura
Lloyd
s TSB
Commerz
bank
Soc G
en
Credit A
grico
leRBS
Banco
Santan
der
0
100
200
300
400
500
600
700
Credit Spreads since June-2008 - Trading Ranges
Cre
dit D
efau
lt Sw
ap (C
DS)
leve
ls [b
asis
poi
nts
over
LIB
OR
per
ann
um]
high
low
maximum 1360
current
Appendix: Market Colour Data
34
Rates, Credit and Volatility
Volatility in a bit more detail
Source: Catley Lakeman, JP Morgan Derivatives and Delta One Strategy, Bloomberg (17-June-2013)
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
0.00
5.00
10.00
15.00
20.00
Knock-in Put Price (5 year)
Knock-in Put Price (2 year)
Impl
ied
Vol
atilit
y
Kno
ck-in
Put
Pric
e (%
)
CATEGORIES OF STRUCTURED INVESTMENTS
35
USE TYPE EXAMPLE SITS ALONGSIDE
Gearing / Participation Uncapped Accelerator / Supertracker Large cap / core long only funds and ETFs
Synthetics Range Accrual ZDPs
Autocalls Defensive Autocall Equity income finds and absolute return funds
Yield Enhancement
Defined Return
Selling Volatilty
Range Accruals
36
• The other success story over the last year, beyond autocalls
• With the backdrop of falling rates, falling vol and tightening credit, in most cases
these structures have outperformed the market
USE TYPE EXAMPLE SITS ALONGSIDE
Yield Enhancement Defined Return Selling Volatilty
Synthetics Range Accrual ZDPs
RESULTING STRUCTUREMANAGER CONSIDERATIONS & DECISIONSHOW TO GET HIGHER YIELD
Yield : circa 3.00%
Construction (‘Synthetics’)
This slide shows the evolution of a live trade.
HSBC 6y Fixed Rate Bond
*All pricing as at circa early Oct-12
Yield : circa 5.00%
Yield : circa 6.85%
Yield : circa 7.00%
Put capital risk
Put coupon at risk (via lower barrier)
Put coupon at risk (add upper barrier)
Which underlying should the structure be linked to? FTSE
At what level should the lower barrier be?Coupon paid annually as long as the FTSE is over 3500 points.
To what extent is the manager prepared to put capital at risk?Soft protection at maturity at 3500 points.
At what level should the upper barrier be?7% annual, accrued daily for every day the FTSE closes within the range of 3500 to 7500 points.
Any additional considerations?In this instance the investors wanted semi-annual income, so the structure pas up to 3.5% semi-annually.
HSBC 6y FTSE Reverse Convertible
HSBC 6y FTSE Digital
HSBC 440 6y FTSE Range Accrual
37
HSBC 6y FTSE Reverse Convertible (5.00%)
38*All pricing as at circa early Nov-12
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
8000
8500
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
FTSE
100
Strike : 5800 points
5.0% coupon paid regardless of what the FTSE has done
5.0% coupon paid regardless of what the
FTSE has done
5.0% coupon paid regardless of what the FTSE has done
5.0% coupon paid regardless of whatthe FTSE has done
5.0% coupon paid regardless of what the FTSE has done
5.0% coupon paid regardless of what the FTSE has done
0%
2%
4%
6%
8%
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
Cou
pon
Paym
ents
Soft Protection at Maturity: 3500 points
Coupon: 5.0%
HSBC Bond Coupon: 3.0%
HSBC 6y FTSE Digital (6.85%)
39*All pricing as at circa early Nov-12
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
8000
8500
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
FTSE
100
Strike: 5800 points
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
no coupon paid as FTSE has fallen
below the lower barrier at the end of the year
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
0%
2%
4%
6%
8%
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
Cou
pon
Paym
ents
Lower Barrier: 3500 points
Soft Protection at Maturity: 3500 points
Potential Coupon: 6.85%
HSBC Bond Coupon: 3.0%
HSBC 440 FTSE Daily Range Accrual (7.0%)
40*All pricing as at circa early Nov-12
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
8000
8500
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
FTSE
100
Upper Barrier: 7500 points
Strike : 5800 points
7% coupon paid as FTSE stayed
between barriers for whole year
1.75% coupon paid as FTSE exceeded theupper barrier for 75% of
the year
3% coupon paid as FTSE fell below the lower barrier for 50% of
the year
2.3% coupon paid as FTSE fell below thelower barrier for 33% of
the year
7% coupon paid as S&P 500 stayed
between barriers for whole year
7% coupon paid as FTSE stayed
between barriers for whole year
0%
2%
4%
6%
8%
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
Cou
pon
Paym
ents
Lower Barrier: 3500 points
Soft Protection at Maturity: 3500 points
Potential Coupon: 7%
HSBC Bond Coupon: 3.0%
41Source: Data as at 29-Jan-13
Eg: HSBC 363 FTSE Daily Range Accrual (8.0%)
HSBC 363 FTSE Daily Range Accrual (8.0%)
Strike: 9-Jan-11
Counterparty: HSBC
Currency: GBP Denominated
Underlying: FTSE 100 (5460.38 points)
Maximum Term: 6 years
Platform: EIS (subject to CGT under current tax rules)
Upside:8% annual coupon accrued daily, for every day the FTSE closes between 55% and 150% of the initial level ( 3003.21 to 8190.57 points)
Downside (55% European Knock-In Put):
if at maturity the FTSE has fallen by more than 45% of the initial level (below 3003.21 points) , the structure will redeem paying the original capital minus 1% for every 1% the Index has fallen below the initial level
42
Mark-to-Market
Source: Bloomberg, data as at 17-June-13
Nov-11 Feb-12 Jun-12 Sep-12 Dec-12 Apr-13 Jul-1375.00%
85.00%
95.00%
105.00%
115.00%
125.00%
135.00%
FTSE 100 Index Performance [Price]
HSBC 363 Performance
Total return of index = 127.45% (dividend reinvestment assuming Net of Corporate Tax rate 20%)
Structure performance to date: 25.25%
FTSE TR performance to date: 27.45%
Structure annualised volatility: 5.87%
FTSE 100 annualised volatility: 14.59%
43
CS 425 FTSE Quarterly Range Income
Credit Suisse 425 FTE Quarterly Range Income (2.25%) Note
Strike: 13-Sep-12
Counterparty: Credit Suisse
Currency: GBP Denominated
Underlying: FTSE 100 (5819 points)
Maximum Term: 6 years
Platform: Note (subject to income tax under current tax rules)
Upside: 2.25% quarterly coupon paid out quarterly, so long as the FTSE remains between 3500 and 7500 points for the entire quarter.
Downside (3500 points European Knock-In Put):
if at maturity the FTSE has fallen below 3500 points at maturity, the structure will redeem paying the original capital minus 1% for every 1% the Index has fallen below the initial level
44
How would this have looked in 2005? Estimation of a 6 year structure today with soft capital protection at 60%
PARTIALLY CAPITAL PROTECTED STRUCTURES6 year Today
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash Sell 5yr European
Put Option on the FTSE Risk At 60%
Strike (‘Knock-In Put’)
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 87.14p
Aggregate Costs 1.49p
Sell put risk premium 18.02p
Amount to invest 29.39p
Price of 1 call option today 13.10p
Therefore with 29.39p, investor can buy 2.24x call options→ 224% participation
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
Pricing as at circa mid June 2013
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