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Product Structure
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Created: by bchip Attachments:3

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Product Structure

  #1 (permalink)
Africa
 
Trading Experience: Advanced
Platform: NinjaTrader
Favorite Futures: ES,YM,CL,GC,6A,6E
 
Posts: 35 since Sep 2017
Thanks: 42 given, 28 received

Product Structure

Hi all

I see that a company (Investec) has brought out a very interesting structured product.
the sum of it is that
- it guarantees a 44% return in local currency (not USD) if the SP500 is flat or positive
- if the S&P gains more than 44% you gain that as well
- if the S&P loses between 0-40% then your capital is protected 100%
- if the S&P loses more than 40% you lose more than 40%

Its a fascinating structure, I just have no idea how they do this.
Typically I know that they buy some ETF (which they then keep the dividends) as an extra income.
They obviously also use Options for the protection.
Whats amazing though is the 44% return on a flat index.

Ive attached the full brochure and then a screenshot of the possible returns.

Any thoughts or ideas on this?

Attached Thumbnails
Product Structure-sp500overview.pdf   Product Structure-struct.png  

Last edited by bchip; August 13th, 2019 at 09:16 AM.
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  #2 (permalink)
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  #3 (permalink)
London, UK
 
 
Posts: 68 since Jan 2018
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Wrong forum


Hi,

Firstly, the return is 44% in 3 years - from the original original post it's possible to mis-understand this as being
after 1 year.

Secondly, I think you have posted this is the wrong part of the forum - this section is "Options on futures", as opposed to
investment funds/products.

Best regards.

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  #4 (permalink)
Africa
 
Trading Experience: Advanced
Platform: NinjaTrader
Favorite Futures: ES,YM,CL,GC,6A,6E
 
Posts: 35 since Sep 2017
Thanks: 42 given, 28 received

Correct 44% in local currency over 3.5 years.
A comment I saw from the company was that if this was done in USD only it would be a 6% return.
Which by my calcs means the guaranteed money simply must come from the expected dividends
(i.e. they believe s&P will produce 2% divs per annum)
They've then hedged the local currency somehow.

Reckoned it must be using about 3 options and an ETF to get the structure
Just trying to figure out what option structure could do this and if one could apply it to other shares.

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  #5 (permalink)
Africa
 
Trading Experience: Advanced
Platform: NinjaTrader
Favorite Futures: ES,YM,CL,GC,6A,6E
 
Posts: 35 since Sep 2017
Thanks: 42 given, 28 received

Answer

Think I figured it out.


Thinking it might be better to just be Long ETF, Long Put Option
At least it will protect you all the way down then.
Plus less fees to someone else
(but this is assuming the Put fees arent too expensive which I could be wrong with,
which would then take me back to the above structure...)

Attached Thumbnails
Product Structure-investec.png  
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  #6 (permalink)
Legendary Market Wizard
Houston, TX
 
Trading Experience: Advanced
Platform: XTrader
Broker/Data: Advantage Futures
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Guaranteed Return of Capital Structures with Market Participation were very popular back in the 90s and the underlying derivatives were one of the bigger positions and a major source of losses in LTCM books when they collapsed. Back then I believe the strategy was to invest X% of the money in a bond or interest rate product that by the end of the term would have grown to the initial principle hence guaranteeing your capital. Then the (100-X)% remaining principle was used to buy long dated equity index call options, hence giving you some market participation as well. Of course you miss out on dividends and the total return of the index is higher than outright return.

Assuming these work the same way (big assumption that is potentially flawed) with SA interest rates at 6.5% and assuming a 3 year term, X would need to be only 79%. That would leave 21% of the initial capital available to construct a favorable option structure. Still not sure how you get to what they are offering but hopefully you can see how things like this can be constructed.

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  #7 (permalink)
São Paulo, Brasil
 
 
Posts: 5 since Mar 2017
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I will check this...

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  #8 (permalink)
Legendary Market Wizard
Houston, TX
 
Trading Experience: Advanced
Platform: XTrader
Broker/Data: Advantage Futures
Favorite Futures: Energy
 
Posts: 2,970 since Dec 2013
Thanks: 2,411 given, 5,316 received

Watched an Interview with Harley Bassman on Real Vision TV yesterday from last month. One of the things he talked about was how structured products and the rules of Arbitrage can create unexpected results/prices. For example when it comes to index arbitrage we know where the index should be in the future, as it's just a function of holding costs (interest rate's) versus dividend yield. He talked about an example last year in Europe, where the combination of negative interest rates and high dividends on the Euro Stoxx 50 meant that the 10 year forward of the Euro Stoxx 50 was trading at a 25% discount to the spot index! Not difficult to imagine how you could structure some interesting structured products based upon that. For example go back to my previous example where you have "21% of the initial capital available to construct a favorable option structure" and combine that with a forward index price that's substantially discounted!.

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