Expert Advice needed on Structured Note

[wickedpork]

Hi need some expert advice on the viability of this structured note from my bank:

1) Interest payable – 8.00%p.a (Buffer Line at 92.50%) 16.00%p.a (Buffer Line at 77.50%), monthly paid, first one month unconditional payout of 8.00%p.a.

2) 3 stock prices which would be observed – Apple, Google and Baidu

3) 22.50% downside buffer.

4) Early maturity will occur if all stocks prices perform >= 100% of their Initial Levels at least once either concurrently on the same Observation Date or separately on different Observation Dates.

5) Daily Observations Dates at close.

6) No initial entry fee/sales charge to be rendered on your investment amount.

Min. amt: $50k

Thanks in advance!

 

[wahkao3]

wtf just buy the damm stock yourself directly, dont bother to complicate it into a structure note hidden behind mountain of T&C!

 

[Shiny Things]

Hi need some expert advice on the viability of this structured note from my bank:

1) Interest payable – 8.00%p.a (Buffer Line at 92.50%) 16.00%p.a (Buffer Line at 77.50%), monthly paid, first one month unconditional payout of 8.00%p.a.

2) 3 stock prices which would be observed – Apple, Google and Baidu

3) 22.50% downside buffer.

4) Early maturity will occur if all stocks prices perform >= 100% of their Initial Levels at least once either concurrently on the same Observation Date or separately on different Observation Dates.

5) Daily Observations Dates at close.

6) No initial entry fee/sales charge to be rendered on your investment amount.

Min. amt: $50k

Thanks in advance!

Right, so what you're doing here is you're betting a HUGE amount of money that these stocks will not go down in a straight line. If none of those three stocks go down in a straight line after the first month, you get closed out with a 0.6% return (that's what it is: 8% p.a. for one month). If any one of those three stocks fails to go up, you will lose an absolute ton of money - like 22.5% - when the downside buffer gets hit.

So you're risking 22.5% to make 0.6%. If you're not comfortable with that, don't invest.

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Another way to look at it: when you're pricing up something like this, the biggest contributor to the price is the correlation between the three stocks. You're making a huge bet that correlation between AAPL/GOOG/BIDU will go up. And I'll bet you that you have no more opinion on the tech-stock correlation market than I do.

Do you have a market view on the correlation between those three stocks? If you don't, don't invest.

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Seriously - this thing is an awful idea. And even though they say "no upfront fees", they will absolutely rip your eyes out with hidden fees - you're probably getting slugged quite a few percentage points on this thing, hidden in the bank's profit on the embedded equity option. Don't do it.

 

[wahkao3]

So you're risking 22.5% to make 0.6%. If you're not comfortable with that, don't invest.

this is a classic example of High risk, low return

The banks are notorious at making you take on high risk low return opportunities while they profit the difference

 

[wickedpork]

thks

thanks to all for your advice.. i will heed your advice.

 

[wintersonata1234]

Really like this forum here cos people are more sincere and willing to share their knowledge.

Thanks all, especially to Shiny!

 

[Shiny Things]

Really like this forum here cos people are more sincere and willing to share their knowledge.

Thanks all, especially to Shiny!

Hey, no worries - happy to help.

I used to be on the other side of these things - structuring them up and trading them - so I like being able to share what I learned.

 

[wahkao3]

yes, shiny is the xpert on this

 

[Majestic12]

If you don't do this, how is the bank in question going to be able to post quarter-on-quarter record profits?

Hedge by buying that bank's equity.

 

[Keverus]

scb????????????

 

[Shiny Things]

Hedge by buying that bank's equity.

So this is as good a point as any to nerd out about structured note structuring and hedging.

Majestic's being facetious, of course. Yeah, the banks will rip your eyes out on this thing, they'll make a ton of money, structuring is a nice revenue stream for banks, blah blah. But here's a thing: as people learned the hard way in the Minibonds blowup, when you buy a structured note, you have exposure to the issuer's credit as well as to the actual stocks that underlie the structured note.

So if you're being really picky about your hedging, or if an issuer starts to look shaky and you own their structured notes, the right move is actually to short the bank's equity (or buy senior CDS, if you're being picky). If the bank blows up and they default on the structured note, you'll make some money on the short stock position to offset the losses on the note.

Buying a bank's stock, and then buying structured notes issued by that bank, gives you a hidden double-risk. Just in case you needed another reason not to buy structured notes.

 

[kletian]

Are there any good reasons why clients subscribe for all these structured products such as equity linked notes or DCIs when they can DIY (at lower costs) by buying/selling a combination of calls/puts?

I was thinking:
- Underlying is usually tracked and recommended by the bank's research team
- Someone to monitor for you, do up the calculations etc
- There is automation set in place, instead of you manually entering trades monthly

I'm not sure if the above applies, can Shiny give some advice?

Thanks!

 

[Majestic12]

Here's an easy one: They don't know any better. Or, they do it to support their bankers. Never underestimate the power of relationships.

Are there any good reasons why clients subscribe for all these structured products such as equity linked notes or DCIs when they can DIY (at lower costs) by buying/selling a combination of calls/puts?

I was thinking:
- Underlying is usually tracked and recommended by the bank's research team
- Someone to monitor for you, do up the calculations etc
- There is automation set in place, instead of you manually entering trades monthly

I'm not sure if the above applies, can Shiny give some advice?

Thanks!

 

[kletian]

Here's an easy one: They don't know any better. Or, they do it to support their bankers. Never underestimate the power of relationships.

I know some reasons why investors buy the products but those aren't good reasons (like what you said) to buy the product... Yea some investors are just drawn to the high 'interest' without understanding the risks of selling options or somehow they are restricted from trading options but not restricted from buying structured products.

Maybe I should phrase my question better: Do the structured products provide any advantages or benefits at all?

 

[Shiny Things]

Are there any good reasons why clients subscribe for all these structured products such as equity linked notes or DCIs when they can DIY (at lower costs) by buying/selling a combination of calls/puts?

No. There are literally no good reasons to do something as a structured note unless you're trying to do an end-run around some sort of restrictions (e.g. "oh, retail clients can't sell worst-of kick-in basket options because they're horrendously complicated and the loss is theoretically uncapped? Let's turn it into a structured note and we can pump out as many as we want!").

 

[kletian]

No. There are literally no good reasons to do something as a structured note unless you're trying to do an end-run around some sort of restrictions (e.g. "oh, retail clients can't sell worst-of kick-in basket options because they're horrendously complicated and the loss is theoretically uncapped? Let's turn it into a structured note and we can pump out as many as we want!").

Thanks for clarifying/confirming!

 

[bazingaman]

So you're risking 22.5% to make 0.6%. If you're not comfortable with that, don't invest.

Really, this is what made me to read & admire Shiny Things posts. Keep it in a simple no T&C jargon.

 

[Sunny188]

I agree that we should not buy any products that we don't understand or have no view on the underlying.

Let me offer an alternative view.

For this product, in addition to all the points that have been raised, we should also consider the "odds". Investment is a gamble.

I am of the view that the chances of this product having early maturity is very high. Consider this:

The initial price will be fixed sometime in the near future. What are the chances that one of the 3 shares peaks on this date? If this date is not the peak for any of the 3 shares during the tenure (which means share price will be >= 100% during tenure), then the product will be terminated. This is good for investors. You get the 8% p.a. interest for this period and your principal back. Go and look for another opportunity.

Even if one of the 3 shares starts going down from that date and never recovers till the initial price within the tenure, considering that the 3 shares are Apple, Google and Baidu, what are the chances that the price will fall 22.5% within the tenure? Unlikely but not impossible. Remember investment is a gamble. Is 8% worth the bet? Everybody has to answer this question himself.

P/s You have to ask your banker when do you lose your bet, is the 22.5% price observed on the last day only or any time during the tenure? And what happen? You have to buy the share at 22.5% regardless of the share price at mature?

 

[V_for_Vanilla]

This is like Equity-linked Note. The banks cobbled in more stocks, from just one in the past to now three, and it becomes more complex. Although participation amount is lowered to $50k to make it more palatable. My hunch is besides churning, they may be structured for the retail participants to be the counter party "taking the fall". Sorry if my language is imprecise. Anyway, avoid.