Investments too close to call

Two of the best performing products which kicked-out early during April 2019 were both linked to the pair of indices FTSE 100 and Euro Stoxx 50. The products are the Mariana Dual Index 10:10 Plan April 2016 which was a ten year auto-call product with annual kick-out dates from year three, and the Meteor FTSE/STOXX Kick Start Plan April 2018, which is a six year auto-call product with annual kick-out dates from year one.

Kick out at the first chance

Both products kicked out on their first auto-call date, providing generous returns to investors. Mariana’s product kicked-out after three years, providing a return of 45.75% (15.25%p.a. not compounded, 13.38% p.a. compounded) and Meteor’s kicked-out after one year, providing a return of 14%. Meteor’s product had a kick-start feature and the first year provided a higher return of 14%, and then a lower return of 10% p.a. calculated at the time the product is called. However, given that the product kicked out after one year, the maximum annual return was received which proved to be a good construction choice. Both products were capital at risk and if not called then capital is lost if the European barrier of is breached. The barrier levels were 60% for Meteor and 70% for Mariana.

Close call

For the Meteor product the strike price for the EuroStoxx 50 was set at 3,448.00 on the 13th April 2018. The level of the index on the 15th April 2019 was 3,450.46, which led to both the Meteor and Mariana products kicking out. However, had the kick-out date for the Meteor product been the previous working day (12th April 2019) then the product would not have kicked out as the index level (3447.83) on that day was just under the strike level (which was also the Autocall target level). The product kicked out by just two points on the Eurostoxx, making it a very close kick out for investors. This is a feature of Auto-call products, that the annual tests can hinge on small margins whether calls occur or not.

It was a close call for Mariana too, as one of the conditions for this product was that both indices needed to grow by 10% for the product to call. The market did grow by over 10%, however to allow successful calling.

Analysis

The simulated probabilities of outcomes for both products under a conservative risk neutral forward looking analysis are shown below.

Outcome Meteor Mariana
 
Call at point 1 32.09% 25.13%
Call at point 2 10.52% 7.97%
Call at point 3 6.28% 4.86%
Call at point 4 3.68% 4.21%
Call at point 5 2.95% 2.91%
Call at point 6 2.27% 1.94%
Call at point 7 N/A 1.65%
Call at point 8 N/A 1.17%
Full capital return 17.11% 8.76%
Capital loss 25.1% 41.4%

Conclusion

Investors would have been happy with either product as they both provided high returns, with the Meteor product being slightly higher than Mariana’s. Both products also comfortably outperformed both indices on a capital return basis which means that they beat the equity benchmarks.


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