A recent trip to a local bank branch to renew a term deposit went something like this:Mouth-breathing Olive Farmer - What're ya payin' on x fer upta a year?
Silken-tongued Manager - I'm not sure, sir. I'll have to look it up. But you might be interested in this product we're offering.
MOF - Listen smart ass, I don't wanna hear nuthin' about no struckchered producks.
SM - No, no. Don't you worry, sir. No structured products for you. But, just listen to this offer.
Total, we were so amazed by the what ensued that we can't resist sharing it with our readers - notwithstanding that the manager told us that the document we asked to take home was 'internal'.
It works like this...
- 1). 70% of the reader's money goes into a 1-year term deposit paying 5.06% interest.
- 2). 30% goes toward the purchase of four index component stocks
- a. Yield variable over maximum 36-month term according to the following conditions:
- End of 1st year: if all four stocks are trading above their value on the day the contract was signed, the bank pays the reader the principal plus 10% and closes out the deal. Otherwise, the bank pays 2% and the contract continues in force.
- End of 2nd year: if all four stocks are trading above their value on the day the contract was signed, the bank pays the reader the principal plus 20% and closes out the deal. Otherwise, the bank pays 2% and the contract continues in force.
- End of 3nd year: if all four stocks are trading above their value on the day the contract was signed, the bank pays the reader the principal plus 30%. Otherwise, the bank pays 2% and the contract comes to an end.
However, if at this time any one of the stocks is trading at less than 60% of its initial value, the bank takes the reader's investment and, rather than returning it, buys and delivers to him or her that value of shares in the worst performing component at the price it traded for 3 years prior.
Mention our name and receive a free newfie pistol.
----------------------------
7 Comments:
Holy crap! I think I might have better luck with the Trileros .
The last point was a bit fuzzy for me.
You mean that you get whatever is left over as if you had invested 100% of the 30% in the worst performing stock during the 3 years?
It took me a minute to get it, too. That's why your maximum loss is 23% if the worst stock goes to zero.
Wouldn't it be 18% since you get the interest on the 70%?
Not sure how taxes work here, but in the US you wouldn't be able to apply the capital loss against the interest you, so you still have to pay taxes on the full 6%.
Looks like your mouth-breathing olive farmer needs a Multi-Asset Option Pricer.
This one really got you going, didn't it?
5% of 70,000=3,500
6% of 30,000=1,800
Total interest=4,300
Loss on bankruptcy of 1 stock=30,000
Total loss in that case=25,700
=25.7% of original investment.
How they arrive at 22.8% is beyond me.
Yeah... I love puzzles. With any structured retail product, it's always fun (for weird people like me) to figure: "Please estimate how much is the consumer being ripped off?"
I had never heard how "rainbow" options before, but "min-of-4 puts" are damn expensive. Plugging 4 random IBEX components into the exotic options calculator got me a price of about 31 per 100 for a 3 year option. (I'm sure they do better by picking the most volatile and least correlated components).
So the bank sells a min-of-4 put and pockets the difference in fees. Depending on the outcome, the profits range from small to large (but the bank wins in all cases):
Here's a link: google doc
What is really going on is that the bank's structured trading book is shorting correlation. If correlation is high, the y1, y2 and y3 autocalls are more likely to be hit. This is good for the investor so they are long correlation. The bank is short as they want correlation to be low.
The 60% one touch means that the bank is long vega in the wings which is otherwise difficult to buy.
It's by no means the worst product I've seen this month...
Post a Comment