Upload
anand-kothari
View
227
Download
0
Embed Size (px)
Citation preview
8/8/2019 ARK Structured Products
1/15
Structured ProductsMay 31, 2008
8/8/2019 ARK Structured Products
2/15
What is this creature all about?Why bother with them?
Combines features of equity and debt instruments
Created by combining debt instruments and equity options Customised risk / reward
Occasionally mispriced, give opportunities
Right now
8/8/2019 ARK Structured Products
3/15
What if?
Your investment only went up in line with equity markets and did not comedown? OR
Your investments went up 1.4 times the increase in equity markets and did notcome down? OR
You could buy NIFTY at a 17% discount OR You could select a basket of stocks and get returns only linked to the best
performing stocks OR
You could earn around 15% per annum fixed, provided equity markets did not
fall more than 20% below current levels after 3 years
8/8/2019 ARK Structured Products
4/15
Typical equity payoff
0 940 1880 2820 3760 4700 5640 6580 7520 8460 9400
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
Payoff chart
Profit / loss
8/8/2019 ARK Structured Products
5/15
Structured product pay off
870 1870 2870 3870 4870 5870 6870 7870 8870 9870
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
Equity
SP
Other SP
Index Levels
Profit/Lss
8/8/2019 ARK Structured Products
6/15
Common features
Either Buy debentures (directly / indirectly) issued by brokers,
investment banks (Citi, Deutsche, Kotak, Edelweiss) OR
Make one yourself Capital protection OR at risk
Equity linked returns
8/8/2019 ARK Structured Products
7/15
Common structures
Capital protected equity linked notes (capital protection andupside of equity markets), with / without locking in of interimprofits, with / without cap on annual returns
Reverse convertibles (high interest, no capital protection) Returns linked to a basket of stocks
& thousands of more structures
8/8/2019 ARK Structured Products
8/15
Live example 1 Cautious outlook
Alternative A
Invest in NIFTY @ 4,870
Say you invest in 100 NIFTY with an investment of Rs. 4,87,000
Investment will move up and down in value based on movement of NIFTY
Alternative B Create a capital protection structure
Maturity June 30, 2011
Capital protection
Full equity upside
Structure
Buy 100 call options maturing on June 30, 2011 @ 952, Investment of Rs. 95,200
Invest (Rs. 4,87,000 Rs. 95,200) = Rs. 3,91,800 @ 8.5% quarterly for 3 years and1 month.
8/8/2019 ARK Structured Products
9/15
Profit / loss from Alternative B
If NIFTY is lower than 4,870
Rs. 3,91,800 will grow to Rs. 5,07,800 in 3 years and 1 month.
The call option expires worthless. You get a return of approximately 1% pa.on your money after 3 years and one month
However If the market is up 20%
You get 20% return on your portfolio
If market is up 40%
You get 40% return on your portfolio
And so on.
8/8/2019 ARK Structured Products
10/15
Live example 2 Full faith in equity markets .
Alternative A
Invest in NIFTY @ 4,870
Say you invest in 100 NIFTY with an investment of Rs. 4,87,000
Investment will move up and down in value based on movement of NIFTY
Alternative B Create a future investment structure
Maturity June 30, 2011
NO capital protection
Full equity upside AND downside
Buy NIFTY at a discount
Structure
Buy 100 call options @ 952 & sell 100 put options @ 900, Net investment of Rs.5,200
Invest (Rs. 5,00,000 Rs. 5,200) = Rs. 4,94,800 @ 7% p.a. for 3 years and 1month.
8/8/2019 ARK Structured Products
11/15
Profit / Loss from Alternative B
Invested amount of Rs. 4,94,800 grows to Rs. 6,09,578
Effectively Nifty purchase at 5000 + 52 1095 = Rs. 3,957
Discount of 17.7%
Participate in all upside AND downside from these levels
8/8/2019 ARK Structured Products
12/15
Why not invest in the 140% participation structure?
Do not forget credit risk!!!!
We have assumed 8.5% returns considering SBI returns
If Interest rate is higher, amount invested in bank FD / debt funds is lower,more options can be purchased
Participation period and maturity period not the same Do not forget compound interest
Profit booking structures also lower participation in a big upmove
Consider caps and floors . Etc.
8/8/2019 ARK Structured Products
13/15
Which car is better?
.. depends
8/8/2019 ARK Structured Products
14/15
Understanding = knowing what questions toask
Importance of understanding the product and not beingswayed by the packaging
Understanding the creation of structured products
Strong advice: do not buy anything that you do notunderstand
Comparing
Apples, oranges, mangoes, bananas
8/8/2019 ARK Structured Products
15/15
Thank You
Great Western Building, 1st Floor, 130-132, Shahid Bhagat Singh Marg,
Near Lion Gate, Fort, Mumbai - 400 001. INDIA.
Tel. : 91 22 2284 6555 (7 Lines) Fax : 91 22 2284 6553
Web site : www.ppfas.com