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Title: This information is for professional investors only and should not be presented to, or relied upon by, private investors.


1
Innovative Solutions Immaculate Service
Meteor Asset ManagementStructured Products for
Retail Investors2009
This information is for professional investors
only and should not be presented to, or relied
upon by, private investors.
2
Contents
Topic Slide Background A
sset Classes x Rationale for Structured
Investments Client Motivations x Market
Factors and Sensitivities Price
Sensitivities x The Greeks x Structured
Products Overview x Advantage and
Disadvantages x A Basic Structured
Product x Risks in Structured
Products x Volatility Dynamics x
3
Background
  • Structured products are sometimes referred to as
    Protected Investments and may be seen to combine
    the safety of a bond whilst potentially achieving
    higher returns by providing exposure to equity,
    commodity or other indices
  • Derivative markets are relatively inaccessible to
    non-professional / non expert investors
  • Lack of knowledge among investors
  • High levels of investor protection, especially
    for private investors
  • Lack of access to professional pricing
  • Some products simply not available such as bank
    zero-coupon bonds

4
Background
  • Many investors in the early 90s lost out to
    poorly designed Precipice Bonds where investors
    were exposed to geared downside in the event of a
    market decrease i.e. for every 1 fall, the
    investor lost 2
  • The reputation of structured products has been
    damaged due to this and other mis-selling
    examples
  • More recently, counterparty risk has been a hot
    topic with the collapse of Lehman Brothers in 2008

5
Rational for Structured Products
Overview
  • Capital protection
  • Leveraged upside exposure
  • Exposure to difficult to access assets classes
    i.e. inflation,
  • Exposure to bespoke baskets of assets
  • Income or growth
  • Defined returns
  • Completely bespoke!

6
Rational for Structured Products
Client Motivations
  • Client would like to participate if the stock
    market recovers, but not suffer if it declines
  • Structured products provide a means by which to
    benefit from stock market growth but not suffer
    from declines
  • This has to cost something
  • How?
  • No dividends, lt100 upside participation, capped
    upside

7
Rational for Structured Products
Client Motivations
  • Client would like exposure to commodities but
    doesnt know where to start
  • There is obvious potential merit in buying access
    to an unfamiliar market
  • To diversify a portfolio
  • Through a structured vehicle
  • Sold by a familiar organisation

8
Rational for Structured Products
Client Motivations
  • Client would like exposure to commodities but
    doesnt know where to start
  • There is obvious potential merit in buying access
    to an unfamiliar market
  • To diversify a portfolio
  • Through a structured vehicle
  • Sold by a familiar organisation

9
Rational for Structured Products
Client Motivations
  • Clients like the idea of having a limited range
    of pre-determined outcomes for my portfolio
  • Sky is the limit for equity investing however
    total, or near complete loss is possible
  • Can clients make money in sideways or falling
    markets?
  • Yes, the direction of a market is an important
    investment class, up or down
  • However, the volatility of a market is also an
    important area of prediction and opportunity

10
Rational for Structured Products
Client Motivations
  • Clients ask, how can they make money in the
    current difficult markets. Analysts would
    suggest
  • Government bonds
  • Corporate bonds
  • Gold
  • Special situation stocks
  • Structured products

11
Rational for Structured Products
Client Motivations
  • Do clients care about income or capital
    preservation primarily?
  • The answer depends on their personal
    circumstances and requires detailed analysis
  • However, do not forget that with BoE base rate at
    0.5 and 5 year gilts yielding 2.5, a structured
    note that offers 11.5 income must be giving you
    principal risk
  • Credit? Real value? Cash value?

12
Important Information
This information has been prepared solely for
information purposes and is not an offer to buy
or sell or a solicitation of an offer to buy or
sell any security or instrument or to participate
in any particular trading strategy. This
information is being delivered to IFAs and
distributors in order to assist them in
determining whether they have an interest in the
type of securities described herein and is solely
for internal use. This information is based on
or derived from information generally available
to the public from sources believed to be
reliable. No representation or warranty can be
given with respect to the accuracy or
completeness of the information, or with respect
to the terms of any future offer of transactions
conforming to the terms hereof. We do not
undertake to update this information. Certain
assumptions may have been made in the analysis
that resulted in any information and
returns/results detailed herein. Changes to the
assumptions may have a material impact on any
results/returns detailed. Meteor Asset
Management Limited and its affiliates disclaim
any and all liability relating to this
information, including without limitation any
express or implied representations or warranties
for statements contained in, and omissions from,
this information. Additional information is
available on request. Meteor Asset Management
Limited does not give investment, tax, accounting
and legal or regulatory advice and prospective
investors should consult with their professional
advisors. This memorandum is not a product of
Meteors Research Department and should not be
regarded as a research report. This
communication is not directed in the UK to those
persons who are retail customers (as defined in
the UK Financial Services Authority's rules).
13
Introduction to Meteor
Who we are
  • Meteor was established in early 2006 with the aim
    of providing individuals, institutions, trustees
    and their advisers with access to an organisation
    that is committed to designing and implementing
    innovative and attractive financial solutions. We
    are always striving to provide a consistently
    friendly and efficient service, in addition to
    delivering imaginative solutions at a competitive
    price.
  • Our product range offers a mix of closed ended
    structured products, open ended investment funds
    and a deposit based account that we believe
    provide a unique opportunity to bring positive
    benefits to a diversified portfolio
  • Our open ended investments are based on a variety
    of underlyings ranging from American Whole of
    Life Policies, FTSE 100 volatility to our soon
    to be announced Clean Energy and Commercial and
    Retail property funds
  • The cornerstone to our structured product range
    is our Prima series, which are autocallable
    structures offering attractive headline
    participation rates, with the investment being
    based on one or two stock market indices and
    using established and respected counterparties

14
Introduction to Meteor
Principal Biographies
  • Graham Devile, Managing Director
  • Graham has spent some 25 years working in the
    financial services sector, including ten years
    with one of the larger UK accountancy practices.
    The majority of this time Graham has spent as an
    IFA working with high net worth individuals and
    corporate clients, providing advice across the
    whole financial services spectrum. From 1999 to
    2006 he was Managing Director of an IFA and a
    structured product provider, and with the latter
    he was heavily involved in the product design and
    marketing activities.
  • In 2006 Graham decided to set up a new business
    from scratch with a team who shared his vision of
    product and investment innovation and as a result
    they established what is now called Meteor Asset
    Management.
  • Simon Bottomley, Finance Director
  • A chartered accountant, having trained with KPMG,
    Simon became Finance Director of a property
    investment management firm. During this time he
    played a key role in a venture capital backed
    management buyout and the subsequent sale of the
    business.
  • In 2001 he joined a financial services group as
    Finance Director. Here his activities included
    managing the finances of its offshore operation
    and its structured product division. He brings
    to Meteor his knowledge of the accounting,
    taxation, product development, regulatory
    requirements and financial implications of
    operating in the investment sector.

15
Introduction to Meteor
Principal Biographies
  • Philip Saunders, Business Development Director
  • Phil began his career as a Broker Consultant with
    Legal General before joining an IFA business
    where he pioneered Guaranteed Income Bonds and
    created new types of income and growth investment
    products.
  • In 1984 he established a business specialising
    in broker funds before selling this and setting
    up a new business in 1992 focused on the traded
    endowment policy market. For the last ten years
    he has specialised in the structured product
    arena working closely with the derivatives desks
    at a number of leading banks and designing the
    products for the retail and corporate markets.
  • At Meteor he can fully exploit his wide range of
    banking contacts, which extend around the globe,
    with a view to securing the best terms possible
    for our clients.
  • Susan Valler, Compliance Director
  • A Fellow of the Chartered Insurance Institute and
    former Chairman of the Investment and Life
    Assurance Group (ILAG) Susan has specialised in
    the area of compliance for nearly 20 years.
  • Prior to specialising in the compliance arena
    she was the Administration Manager of a life
    assurance company. Since moving into Compliance
    she has developed and implemented compliance
    procedures, systems, control, risk mitigation and
    internal audit programmes in a number of
    different environments. Other key areas of input
    include working with the product development and
    marketing departments, as well as the handling of
    issues relating to Treating Customers Fairly.
  • Her role on the ILAG Regulations committee means
    she has an excellent working relationship with
    and knowledge of the FSA and brings a wealth of
    experience to Meteor in this vital area.

16
Introduction to Meteor
Product Range
Meteor Asset Management
Fund Management
Structured Products
Meteor Senior Life Settlements Sterling Fund
Bespoke Products Leverage Protected Autocallable
Growth Income
Meteor Clean Energy Fund
Cashcade (Enhanced Cash Fund)
Linked to Equities Fixed Income Commodities,
FX Funds
Protected Equity Funds UK Europe
Meteor UK Property Funds Commercial Residential
e.g. Prima Series
17
Structured Products
Bespoke Service
  • Meteor are ideally positioned to provide bespoke
    structured products to fit the exact
    specifications for investors portfolio
    requirements
  • We have key relationships with leading investment
    banks in order to procure the best prices as well
    as having a varied choice of counterparty
    depending on the risk objectives of our clients
  • Products can be created to help hedge systemic
    portfolio risks (equity, interest rate,
    currency) as well as simply satisfy stringent
    portfolio performance objectives
  • Products can be linked to any asset class
    including equities, bonds, currencies,
    commodities and funds
  • Flexibility Products range from capital
    protected, leveraged, defined maturity,
    autocallable including capital growth and income
    options
  • We have the experience and expertise to work
    closely with our clients and industry
    counterparties to create completely flexible
    products at the right price in a timely manner

18
Prima Growth Plan 15
Active Product Example
  • An autocallable structured product offering
    11.25 per annum (not compounded) with 5 early
    maturity opportunities
  • Investment returns linked to the performance of
    the FTSE100 (the Index)
  • No Index growth required to achieve quoted
    returns
  • Early maturity will be triggered as long as the
    level of the Index is at or above its Opening
    Level at any anniversary date
  • 100 capital return provided the Index doesnt
    fall by more
  • than 50 over the term of the investment
  • Should the Index fall by more than 50 and not
    recover
  • by the end of the investment term there will be
    a capital loss
  • of 1 for each 1 the Final Index Level is below
    the
  • Opening Index Level
  • Available to 26 May 2009
  • Please refer to the brochure for full plan
    details

19
Prima Plus Plan 6
Active Product Example
  • An autocallable structured product offering 9
    per annum (not compounded) with 9 early maturity
    opportunities
  • Investment returns linked to the performance of
    the FTSE100 and DJ EuroStoxx50 (the Indices)
  • No Index growth required to achieve quoted
    returns
  • Early maturity will be triggered as long as the
    level of the Index is at or above the
    pre-determined barrier levels at any anniversary
    date. The pre-determined Index levels are 100 of
    their Opening Levels at the end of year 1, 95 at
    the end of year 2, 90 at the end of year 3, 85
    at the end of year 4, 80 at the end of year 5
    and 75 at the end of years 6-10.
  • 100 capital return provided the neither of the
    Indices are
  • more than 50 below their Opening Levels on 19
    June 2019
  • If one or both of the Indices are more than 50
    below their
  • Opening Levels on 19 June 2019 capital will be
    reduced
  • by 1 for each 1 the lower performing Index
    finishes below
  • its Opening Level
  • Available to 12 June 2009
  • Please refer to the brochure for full plan
    details

20
Income Structures
Proposal
  • G7 Countries Income Structure
  • 5 year investment term
  • Linked to the G7 countries (UK, USA, France,
    Germany, Italy, Japan, Canada)
  • Income of LIBOR 0.90 paid each year
    (distributed quarterly)
  • Full return of capital at maturity providing
    none of the G7 countries default on their
  • debt
  • If any G7 member state defaults on its debt then
    capital and future income reduced by 1/7th at
  • maturity for each one that does

Data as at 12 May 2009
21
Income Structures
Proposal
  • FTSE 100 20 Stock Income Structure
  • - 5 year investment term
  • - Linked to 20 stocks across a broad range of
    industries in the FTSE 100
  • - Will not be linked to Tobacco or Arms
    companies at the request of the Hospice
  • - Income of LIBOR 3.0 paid each year
    (distributed quarterly)
  • - Full return of capital at maturity providing
    none of the 20 stocks default on their debt
  • - If any company defaults on its debt then
    capital and future income is reduced by 5 for
    each one that does

22
Growth Structures
Proposal
  • HPI (Halifax Price Index) Growth Structure
  • - 5 year investment term
  • Linked to the movement in the HPI which is an
    indicator of residential property prices
  • 100 Capital Protected at maturity
  • 100 of the rise in the market over the 5 years
  • If the market ends at a lower point, full return
    of capital

23
Growth Structures
Proposal
  • FTSE Bull Bear Structure
  • - 5 or 6 year investment term
  • - Linked to FTSE 100 and can create a return in
    both positive and negative markets
  • - 100 Capital Protected at maturity
  • - Downside barrier of 25 (FTSE at 3300 points)
    and upside barrier of 50 (FTSE at 6750 points)
  • - 100 of the rise in the market between these
    barriers
  • - Upside capped at 10 simple growth only if the
    market ends 5 year term at over 50 growth

24
Cost of Solutions
  • Income Growth Structures
  • 100 Allocation (No initial charge)
  • No Ongoing Annual Charges
  • Meteor Costs Built in at outset
  • Daily Priced and nominal administration fee on
    exit
  • Future revenue and profit for Meteor is dependent
    on successful initial structures over
  • the first 5 years to highlight to the Trustees
    the benefits of investing for a further 5 year
  • period at maturity of the various structures

25
Risk Considerations
  • Autocallable structures are very popular at the
    moment
  • Historically high levels of volatility in equity
    markets make for attractive coupons with
    possibility of early redemption
  • Current products pay out early if markets trade
    sideways or up offering attractive returns in
    uncertain times
  • Investors need to be secure with both the payoff
    profile of the product and the levels of
    protection inherent in the them as well as the
    credit quality of the underlying issuer
  • Many banks have been downgraded in the last 12
    months so choosing the right counterparty
    requires in depth due diligence

26
Autocallable Structures Explained
Product Objective
  • Autocallable structures are designed to appeal to
    investors who have an uncertain view on a given
    underlying investment that is not necessarily
    bullish or bearish
  • The product is designed to offer a pre-determined
    performance coupon over a specific time period
    based on the underlying asset being above its
    initial strike level on day 1 on any given
    pre-determined observation date
  • Autocallable structures can be both capital at
    risk and capital protected. If capital
    protected, an attractive coupon payoff can only
    be achieved if some capital is put at risk should
    a low barrier be breached by the underlying
    asset.
  • For instance, if the barrier is 50, the
    underlying asset would have to fall by 50 (or
    more) before any capital is put at risk
  • Typically, if the underlying asset recovers this
    loss and ends up greater than 100 on any given
    observation date (n), then the (coupon n)
    payoff would still be achieved.
  • If, at maturity, the underlying asset has not
    recovered then the capital returned to investors
    will be initial investment underlying asset
    performance at maturity
  • Autocallable structures typically comprise a bond
    (synthetic zero coupon bond) and derivatives
  • Aside from the investment risk inherent in the
    structure, investors should also be aware that
    the products are only as safe as the underlying
    bank issuing them

27
Autocallable Structures Explained
Diagrammatic Overview
28
Autocallable Structures Explained
Overview Explanation
  • The autocall structure contains inherent revenue
    streams in order to purchase securities and
    ultimately pay out a pre-defined coupon (14 n)
    as well as principal returned in full
  • There are 3 revenue streams
  • Premium earned from selling an out of the money
    (OTM) call option (capped upside potential in
    structure)
  • Premium earned from selling and OTM put option
  • Dividends from Equity Index and deposit
  • Revenue streams are required to be enough to
    cover
  • Structure coupon (No of years (n) 14)
  • Shortfall between level of synthetic Zero Coupon
    Bond (ZCB) and 100 initial capital
  • Scenario 1 Index up in Year 1 (T1), product
    calls. Premiums earned would need to cover
  • 14 coupon
  • ZCB 100 84 16
  • Total 30 (Premiums earned in Year 1)
  • Scenario 2 Index up by Year 3 (T3), product
    calls.
  • Index down 10 in T1, down 10 in T2 and up 25
    in T3. Year 1 and 2 do not satisfy the callable
    criteria but by the end of Year 3, the index is
    above its initial level on day 1. Premiums
    earned though the life of the product would need
    to cover
  • 42 coupon
  • ZCB 100 92 8
  • Total 50 (Premiums earned and Year 1, 2 and 3)

29
Autocallable Structures Explained
Product Example
Product example
Illustration
Return on Redemption Date
  • Maturity

3 years
  • Underlying

Equity Index
  • Coupon

14
Product terminates at 142 after Year 3
  • Knock In Put Barrier

50, only observed at maturity
Product terminates at 128 after Year 2
  • Payoff at maturity
  1. Indexgt 100 100 (n x Coupon), else
  2. Indexgt 50, lt100 100, else
  3. Indexgt-50 Percentage level of negative Index

Product terminates at 114 after Year 1
50
0
100
Index Level
  • Zero bond with conditional maturity (it will
    repaid early, if the Equity Index is above 100
    of its initial level on one of the observation
    dates)
  • A series of long digital options with annual
    observation dates on the Equity Index with
    barrier 100
  • A series of short digital options with a barrier
    of 50 on the Equity Index with digital payout of
    50 and a short put with strike 50 on the Equity
    Index

Product Composition
Price Factors
Rates Price Volatility Price Correlation Price Dividend yield Price
? ?? ? ? ? ? ? ?
30
Autocallable Structures Explained
Autocall Decomposition
Scenario Analysis
Start Date
Fixing of the initial value
Offer Price 100
yes
Payout 114
Year 1
Equity Index gt initial level?
no
yes
Year 2
Equity Index gt initial level?
Payout 128
no
yes
Year 3
Equity Index gt initial level?
Payout 142
no
yes
Equity Index gt 50?
Payout 100
no
-
Level of the Equity Index
  • Zero Bond Zero bond with conditional maturity,
    i.e. it will repaid early, if the Equity Index is
    above 100 on one of the observation dates
  • Rationale Facilitates the capital guarantee
  • Long digital option with annual observation
    dates on the Equity Index with barrier 100
    digital payout depending on the timing of the
    coupon being triggered (No of year since
    inception x coupon)
  • Rationale Facilitates the coupon payments
  • Short options Short digital option with barrier
    50, digital payout of 50. Short put strike of
    50 on the Equity Index 3 year maturity with
    knock out, if early redemption was triggered
  • Rationale To finance the long option and capital
    guarantee in case of early redemption

31
Autocallable Structures Explained
Pricing Factors
Hedging a Cash-or-Nothing Call
Digital Options
Vanilla Call
Cash-or-Nothing Call
Strike
Payout
14.0
Underlying
Strike
0
86
100
Digital options have a discrete rather than a
continuous payout profile. There are two types
of digital options cash-or-nothing and
asset-or-nothing. The former pays out a
predefined amount, if the strike has been
crossed. The latter pays out the value of the
underlying if the strike is crossed. Digital
options which never crossed the strike expire
worthless and the investor loses his option
premium.
Digital options can be replicated using call
spreads. A digital option with a payout of 14
can be replicated by a 86 - 100 call spread.
The call payout of 14 will only be paid to the
investor, when the underlying is above the 100
level on the observation date. The trader is
therefore over hedged, which is the name of this
strategy (over hedge-strategy).
  • Rising levels in the underlying will lead to
    increases in price of the Autocallable
  • The coupon payout levels are the upper limit for
    any value increases as the product payout is
    capped at those levels
  • The product payout is linked to the performance
    of the Equity Index
  • Rising volatility will reduce the value of the
    product. The maximum payout is capped, at the
    same time the investor only has a soft capital
    guarantee, i.e. for any falls in the underlying
    beyond the barrier he will fully participate in
    the downside

Underlying
Volatility
32
Summary and Questions
  • Solutions that are removed from the volatile
    nature of world stock markets
  • Solution to Virtually Zero Cash Rates
  • Income Security of assets aligned as primary
    objective
  • Growth Strategies implemented with Protection
    caveat crystallisation mechanism
  • Utilising completely non-correlated asset class
    to aid with income generation
  • Returns achieved with risk profile well within
    given parameters
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