9613978
Description
Flashcards by Mitul Patel, updated more than 1 year ago
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Created by Mitul Patel
over 8 years ago
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| Question | Answer |
| What is it? | -Debt obligation of the issuer that is tied to the performance of an unrelated security or basket of securities - No participation in upside of security for the RC holder -Issuer has a put option on the underlying |
| 2 components |
Investor purchases a bond (from issuer) and sells a put (to issuer). Put sale allows payment of higher coupons
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| Why Buy it? | -Exposure to specific underlying security whilst also paying a coupon For investors expecting sideways or slightly upward trending market. |
| Principal Amount | - Linked to a performance component, typically equity -Not guaranteed |
| Coupons | - Higher than FI instruments of comparable maturities - Higher coupon rate => higher expected volatility of the reference asset => greater likelihood that the knock-in level will be breached, and the investor could receive less than a full return of principal at maturity |
| Benefits |
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| Risks |
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| Example |
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| Variations | -The barrier RC (with a 'Protection'/Knock-In price) -Principal value repayment has a greater protection |
| Example - Performance @ Maturity : Scenario 1 (S_T>S_0, S_t>=KI) |
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| Example - Performance @ Maturity : Scenario 2 (S_T<S_0, S_t>=KI) |
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| Example - Performance @ Maturity : Scenario 3 (S_T>S_0, S_t<KI some t(<T)) |
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| Example - Performance @ Maturity : Scenario 4 (S_T<S_0, S_t<KI (some t(<T)) |
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