Structured Products

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nfactorial

Structured Products: How do they do it?

Look at this one for example:
https://derivative.credit-suisse.com/pdf/product/04/11760704/11760704_productflash_EN.pdf

They pay 3-month US-Libor rates quaterly with a minimum of 2% and a maxmum of 5.5%


Or this one:
https://derivative.credit-suisse.com/pdf/product/01/11724101/11724101_productflash_EN.pdf

It's a certificate on S&P500 with a barrier at 55% of the starting price.
If the S&P500 doesn't reach the barrier they pay 100% of the index performance with a minimum redemption of 110%.
If the index reaches the barrier there is no minimum redemption.

How do they do it?
What's the role of the barrier and how do they compute its level?
What's their comission in this product?


And finally this one:
https://derivative.credit-suisse.com/pdf/product/13/11724113/11724113_productflash_EN.pdf

This one is a bit different. It has three stocks as underlying.
They pay a coupon of 13.5% p.a.
If none of the three stocks reaches its barrier (69%) you get 100% of your capital back.
If a stock reaches its barrier and closes under it you recieve shares of the worst performing stock.
 
These products are sold to retail because the math is too opaque for non-professionals to understand and compute. Buyers can't figure out how much juice is built in.
 
Quote from nfactorial:

Structured Products: How do they do it?

Or this one:
https://derivative.credit-suisse.com/pdf/product/01/11724101/11724101_productflash_EN.pdf

It's a certificate on S&P500 with a barrier at 55% of the starting price.
If the S&P500 doesn't reach the barrier they pay 100% of the index performance with a minimum redemption of 110%.
If the index reaches the barrier there is no minimum redemption.
More...

The 616-strike down and out call isn't a bad deal. The redemption is worth ~13% tops.
 
One of the big problems with these notes is that they expose the holder to the credit risk of the issuing institution. So, while they might be priced OK, in terms of the underlying (I could only take a brief glance at the first one, which looked fine), you have to realize that, ultimately, you're lending unsecured to the issuer.
 
So I just priced this first one (the collared LIBOR floater, aka capped floored floater). It's actually priced rather generously (arnd 4.5% cheaper than the fairish mkt mid). Guess that's the price of long-dated funding.
 
Quote from Martinghoul:

One of the big problems with these notes is that they expose the holder to the credit risk of the issuing institution. So, while they might be priced OK, in terms of the underlying (I could only take a brief glance at the first one, which looked fine), you have to realize that, ultimately, you're lending unsecured to the issuer.
More...

Yes.

However, issuers are usually huge institutions whose business isn't scamming.
These institutions must be able to deliver what they promise and they therefore need to cover their risks (plus comissions). How do they do it?

In order words, if you were to build one of the above products for yourself how would you proceed (I hope you don't have a trust issue lending unsecured to yourself! :) )?
 
I just looked at the 3rd one, it was the easiest to wrap my head around. To me it looks like a really good deal for the seller (Bank):
If just one of the stocks is down 30% at any point in the next year and any of the stocks are below the start level at expiration, the investor gets the his entire investment back, based on the worst performing stock. So the investor risks losing 87.5% of the investment, if just one of the stocks goes to 0. The upside is capped at 13.5%.
The bank has potentially unlimited upside and the downside is capped at 13.5%. Plus they collect dividends on the stock (if they really do in fact buy them) to offset some of the payments made to the investor. Basically the bank gets to buy the 3 equities and under the worst case scenrio, for the bank, will lose 13.5%.

Lets say in a year MCD $100.00, JPM $60, GE $10. Investor ends up with a 60% loser in GE, plus 13.5% gain from coupons, so 47% loss. The bank earns 33% on the two winners for free, nice deal if you can get it.

5yr
 
Quote from nfactorial:
Yes.

However, issuers are usually huge institutions whose business isn't scamming.
These institutions must be able to deliver what they promise and they therefore need to cover their risks (plus comissions). How do they do it?

In order words, if you were to build one of the above products for yourself how would you proceed (I hope you don't have a trust issue lending unsecured to yourself! :) )?
More...
Again, don't really know about the others, but, looking at the first one, it's a rather simple deal. Apart from the bond-like structure (i.e. you pay par up front, receive future cash flows plus get principal back), it's a structure, whose risk is very easy to hedge in the mkt. To me, as the issuer, it's just a combination of a swap I receive, a floor I sell and a cap I buy, all vanilla. If I'm a bank like CS, I can go into the interbank mkt and offset this exposure for, quite literally, next to nothing, provided I have done enough of this biz.

Hence, my point that, to me, given the vanilla structure of the deal, it's all about taking in cash up front. Basically, it's an avenue for banks to fund themselves unsecured and long-term in the retail mkt. They need that desperately, given everything that's been going on.
 
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