What if each stock goes down 25%?
Investor: +13.5%
Bank: -38.5% <- How to hedge this? Buy puts? Capped upside makes me think of vertical spreads
Quote from 5yrtrader:
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:
What if each stock goes down 25%?
Investor: +13.5%
Bank: -38.5% <- How to hedge this? Buy puts? Capped upside makes me think of vertical spreads
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.
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?