Structured products are investment products available to the public whose repayment values derive from the development of one or several underlying assets. Underlying assets are investments such as stocks, interest rates, foreign currencies or commodities such as gold, crude oil copper or sugar. The bank offers structured notes of many credit issuers so that our client remains comfortable with the aggregate risk of the issuers.
The following are the two of the most common notes offered by the bank:
Reverse Convertibles are short-term coupon bearing notes, which are designed to provide an enhanced yield while maintaining certain equity-like risks. Their investment value is derived from the underlying equity exposure, paid in the form of fixed coupons. Owners receive full principal back at maturity if the Knock-in Level is not breached (which is typically 70-80% of the initial reference price). If the underlying stock falls in value, the investor will receive shares of stock, which will be worth less than his original investment. The underlying stock, index or basket of equities is defined as Reference Shares. In most cases, Reverse convertibles are linked to a single stock.
Auto-callable are notes, which are linked to the performance of the underlying assets. There are regular observation dates (or coupon dates), usually once a year. On each of these dates, whether the instrument is early redeemed and/or whether the high coupon is paid depends on the performance of the underlying relative to two predefined barriers, the coupon barrier and the auto call barrier. If the underlying is at or above the coupon barrier, the coupon is paid. In addition, if the underlying is at or above the auto call barrier, the product redeems automatically and the investor immediately receives the predefined cash amount from the issuer of the product. If there is no early redemption, the product continues to the next observation date, where there is again the possibility of early redemption. If there is no early redemption and the product runs the full investment term, this does not automatically result in a loss for an investor since a built-in safety barrier comes into play. This safety barrier is usually set well below the original price of the underlying, for example at 60%. As long as the underlying is above this safety barrier at the end of the investment term, the investor receives back all the invested capital. However, if the underlying is below the safety barrier, the resultant payout will directly reflect the negative performance of the underlying.