Demystifying 7 Myths of Investing
in Structure Products
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Myth 1
Structured Product is a Black Box
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It may not be simple, but it is not complex either
Let us deconstruct with an example
Protected Call Series VIII - ARG/FY2013/JAN/10
Underlying
: Nifty
Tenor
: 1237 days
Coupon
: 61%
Decay Multiple : 1.75
Payoff
: Max(-100%,Min(Coupon, Coupon + DM * NP))
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Construction
Payoff Table
Initial investment : Rs. 100
Park the initial investment at 11.25% p.a.
Returns after 1237 days: Rs. 144
Final Nifty Levels
Nifty Returns
Product Returns
3600
3800
4000
4200
4400
4600
4800
5000
5200
5400
5600
5800
6000
6200
6400
6600
6800
7000
7200
7400
7600
7800
8000
8200
8400
8600
8800
9000
9200
9400
9600
9800
10000
-40.00%
-36.67%
-33.33%
-30.00%
-26.67%
-23.33%
-20.00%
-16.67%
-13.33%
-10.00%
-6.67%
-3.33%
0.00%
3.33%
6.67%
10.00%
13.33%
16.67%
20.00%
23.33%
26.67%
30.00%
33.33%
36.67%
40.00%
43.33%
46.67%
50.00%
53.33%
56.67%
60.00%
63.33%
66.67%
-9.00%
-3.17%
2.67%
8.50%
14.33%
20.17%
26.00%
31.83%
37.67%
43.50%
49.33%
55.17%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
61.00%
Earn premium by selling 1.75 PUTS at Rs. 11
Park the premium amount at 11.25% p.a.
Return after 1237 days : Rs. 17
Total Inflow at maturity: Rs. 161
Payoff Chart
81.33%
61.00%
40.67%
20.33%
0.00%
-20.33%
-40.67%
-61.00%
Nifty Returns
Product Returns
*Assuming initial nifty of 6000
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Product Strategy & Corresponding Payout
Product Strategy
Step 1
Step 2
Step 3
Step 4
Invest principle amount Rs.100
with treasury @11.25% for 1237
days which will grow to Rs.144
Sell Insurance, on Nifty, which
provides 100% coverage to Mr. X
and earn Rs 6.29 premium
Sell Insurance, on Nifty, which
provides 75% coverage to Mr. Y
and earn Rs 4.71 premium i.e.
Total premium earned is Rs.11
Invest total premium of Rs.11 with
treasury @11.25% for 1237 days
which will grow to Rs.17
Final Nifty
Levels in %
Payout of
Step 1
Payout of
Step 2
Payout of
Step 3
Payout of
Step 4
Net Payout
-40%
144
-40
-30.00
17
91.00
-30%
144
-30
-22.50
17
108.50
-25%
144
-25
-18.75
17
117.25
-20%
144
-20
-15.00
17
126.00
-15%
144
-15
-11.25
17
134.75
-10%
144
-10
-7.50
17
143.50
-5%
144
-5
-3.75
17
152.25
0%
144
17
161.00
5%
144
17
161.00
10%
144
17
161.00
15%
144
17
161.00
20%
144
17
161.00
25%
144
17
161.00
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Myth 2
Structured Product is an Alternate Asset Class
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Structured product is not a product, it is a platform or a wrapper like a
mutual fund
Structured Product can form a part of the core portfolio based on the
underlying features of the product
For example, high participation based products can be part of the
equity portfolio where as fixed coupon products can be plugged in the
debt portion of the portfolio
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Myth - 3
Structured Products Never Make Money
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Actual Performance of Some of the Structured Products
Structure Name
Tenure
(Months)
NIFTY
Returns
SP
Return
Returns
Alpha
Coupon
Product
Features
RELIGARE PMS APF (Barclays)
36
61.6%
114%
52%
175% PR product
Milestone NIFTY Linked SPS LVIII
(Macquarie INE796L07258)
16
19.31%
46.74%
27%
Coupon 8% plus 200% PR
product with contingent & KO
Milestone NIFTY Linked LXV
(Macquarie INE796L07274)
16
18.08%
39.61%
22%
Coupon 14% plus 150% PR
product with contingent & KO
MILESTONE NIFTY LINKED SPS VII
(ECL)
24
-1%
18%
19%
18%
18% Fixed coupon with 40% PR
and 100% downside PP
Milestone NIFTY Linked SPS L
(INE804I07BN8)
18
4.56%
22.00%
17%
Coupon of 22% with downside
contingent of 75%
Religare PMS SPS VI (ECL)
15
3%
21%
17%
16.50%
21% auto call coupon
MILESTONE GOLD LINKED SPS I
(Edelweiss)
24
90% PR with 100% downside
protection
51.46%
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Myth 4
Structured Products are Very Risky
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The approximate size of Structured Products market in India today is
US$ 4 Billion*
Not a single default or delay by any issuer till date, since the inception
of structured products in India
*Source - http://www.risk.net/structured-products/news/2135331/-net-worth-investors-india-alternative-assets-report
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Myth - 5
Rating is the only criteria
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Issuer Risk Assessment
Perceived Risk
Actual Risk
Rating generally reflects the perceived
risk of the issuer.
Actual risk of the issuer can be assessed
by considering various aspects:
Rating agencies have set parameters for
Due diligence on balance sheet
rating an issuer. While it is an important
Line of business activity
criteria, it cannot be the only criteria for
Parentage
evaluating the risk.
Understand the risk mitigating
measures of the options desk
(% of OTC contracts..etc)
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Myth 6
Principal Protection is a must
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100% Principal Protection may not be necessary on all Structure Products
Non Principal Protected or Partial Principal protected products can have
better Risk Reward payoff
350.00%
3 Years Nifty Rolling Returns for the past 10 Years
300.00%
250.00%
Returns (%)
200.00%
150.00%
100.00%
50.00%
0.00%
Redemption dates
-50.00%
3 Years Rolling Returns of nifty from 2003 to 2013 suggest that, Nifty has never dropped below 20%
in any of the 3631 observations.
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Myth 7
Costly Affair & No Exit Mechanism
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Cheaper Investment Option
One time 0.5% to 3% fees against 2% management fees annually
charged by Mutual Funds.
Easy Exit Mechanism
Unwind quotes are available almost on daily basis
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Thank You
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of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment
strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that
income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future
performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report.
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