加载中…Equity Derivatives: Equity-Linked Notes (股票指数连接票据与分级基金的关系)
(2011-11-06 01:15:44)
标签：
杠杆基金分级基金泰达进取泰达稳健财经 |
分类： 股票衍生品-股票连接票据(ELN) |
An Introduction to Equity-Linked Notes
edited by Frank Y. Wang
An Equity-Linked Note (ELN) is an instrument that provides
investors fixed incomelike
principal protection together with equity market upside
exposure.
-
An ELN is structured by combining the economics of a long call option on equity
with a long discount bond position.
-
The investment structure generally provides 100% principal protection. The coupon
or final payment at maturity is determined by the appreciation
of the underlying
equity.
-
The instrument is appropriate for conservative equity investors or fixed income
investors who desire equity exposure with controlled
risk.
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Security Description
Security Description
An Equity-Linked Note (ELN) is a debt instrument that differs
from a standard fixed-income
security in that the coupon is based on the return of a single
stock, basket of stocks or
equity index (the “underlying equity”). An ELN is a
principal-protected instrument
generally designed to return 100% of the original investment
at maturity, but diverges
from a standard fixed-coupon bond in that its coupon is
determined by the appreciation
of the underlying equity.
There are many groups of investors who incorporate ELN’s into
their investment strategies,
including:
-
Conservative, risk averse equity investors or intermediate-term fixed-income investors. - Tax-exempt/tax-deferred accounts and off-shore accounts.
-
Investors for whom structural problems prohibit or limit equity allocations (e.g.,certain trusts, retirement accounts/pension funds or insurance companies).
The Equity-Linked Note can be constructed by packaging a call
option and a zero
coupon bond. The call option provides the note buyer with
exposure to the underlying
equity. The zero coupon bond provides the note buyer with
principal protection. A zero
coupon bond allows for principal protection since it accretes
from its discount value to its
par value over a specified period of time without periodic
payments of interest. The
discount from the par value of the zero coupon bond can be
used to purchase the call
option on the underlying equity. Figure 1 illustrates the
structure.
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Economic Performance and Structure
Economic Performance and Structure
The payoff of a typical equity-linked note is equal to the par
amount of the note plus an
equity-linked coupon. In general, the equity-linked coupon is
equal to either:
(a) zero, if the underlying equity has depreciated from an
agreed upon strike level
(usually the index level on the issue date of the note),
or
(b) the participation rate times the percentage change in the
underlying equity times the
par amount of the note, if the underlying appreciated
The participation rate is the rate at which the ELN investor
participates in the
appreciation of the underlying equity. For example, a
participation rate of 100% implies
that a 10% increase in the underlying equity will result in a
final equity-linked coupon of
10%. If the participation rate were instead 75%, a 10%
increase in the underlying equity
would mean a final equity-linked coupon of 7.5%. The
participation rate is typically
adjusted so that the ELN may sell at par.2
As an example of an ELN, assume an investor buys a
hypothetical five-year 100%
principal protected Equity-Linked Note with 100% participation
in the upside of the S&P
500 Index for $1,000. The starting index level is 1,400.
- At maturity, if the S&P 500 Index level is above 1,400, then the payoff of the note
will be $1,000 in principal plus an equity-linked coupon
equivalent to any increase
in the index. For example, if the index level in five years is
2,100 (an appreciation of
50%), then the coupon would be $500 (100%*50%*1,000) and the
total payoff
would be $1,500 ($1,000 + $500).
- If the index level is below 1,400 at maturity, i.e., the underlying equity performance
is negative, the final payoff to the investor will be $1,000
in principal.
Figure 2 illustrates the payout and return analysis for the
hypothetical ELN described
above.
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Figure 2: Payout and Return
Analysis of a hypothetical Equity-Linked Note
Upside potential. The upside potential for this hypothetical
ELN is unlimited. The
potential positive return on the notes is the same as the
positive price return on the S&P
500 Index.
Downside risk. The downside risk is limited. The equity-linked
note provides full principal
protection. Regardless of the final S&P Index
level, principal is returned.
Opportunity Cost. Although ELN’s repay an investor their
principal at maturity, there is
an opportunity cost even where an investor receives a return
of principal in down
markets; i.e., that investor has lost the use of his/her
invested principal for the term of the ELN (in an
investment in a risk-free asset like a T-bill, for example).
Opportunity cost can be defined as the forgone “risk-free rate
of return” that
could have been achieved had the principal been invested in
safe fixed-income
securities, such as US Treasury bills, for the same period.
For example, an
investment of $1,000 on a 6% per annum coupon bond will return
$1,338 at
maturity, $338 higher than the ELN. The equity-linked note
will outperform the
bond as long as the S&P 500 Index reaches a
level higher than $1,875 at
maturity. See Figure 2 above.
Synthetic Equivalent. To synthetically create an ELN, an
investor would (1) invest in a
five-year 6% discount bond for $747.26 (1,000/(1.06)^5) and
(2) buy a five-year,
S&P 500 at-the-money call option on $1,000
notional amount with a $1,400 strike for
$252.74. The initial investment for this structure is $1,000,
the same as for the ELN
($747.26+$252.74).
- If the S&P 500 Index level in five years is above 1,400, then the call option expires
in-the-money. For example, if the S&P level is
2,100, then the payoff of the option is
$500 (50% appreciation of the index multiplied by $1,000
notional amount). The
payoff of the option, combined with the $1,000 principal from
the bond equals the
$1,500 payoff of the ELN.
- If the S&P 500 Index level is below 1,400, then
the call option expires out-of-themoney,
or worthless. The total payoff is therefore $1,000 from the discount bond,
same as the ELN.
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The structure of the ELN and
its components is illustrated in Figure 3.
Additional Considerations
Equity-Linked notes are flexible securities that can be
structured to match the investor’s
riskreward objectives. For example, the
equity-linked coupon can be based on a variety of
domestic and international market indices and individual
stocks. By adjusting the amount
of principal protection or capping the upside potential, there
may be opportunity for
increased participation and/or higher potential returns. The
note can be designed to
have coupons payable on a monthly, quarterly or semiannual
basis. For international
indices, the equity component can be priced with and without
currency exposure. Finally,
the note can be structured so as to achieve a desired
participation rate. Figure 4
describes the factors affecting the participation rate.
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Creditworthiness of the Issuer. Investors should consider the
ability of ELN issuers to
repay principal and interest, if any, at maturity. This will
be based on the issuer’s credit quality.
Taxes. The notes are subject to U.S. Treasury regulations that
apply to contingent
payment debt instruments. As a result, U.S. holders are
subject to federal income tax on
the accrual of original issue discount in respect of the
notes. In other words, even though
the interest coupon is paid at maturity of the ELN, during the
intervening periods,
accumulated interest would be treated as having been received
for income tax purposes.
In addition, gain or, to some extent, loss, on the sale,
exchange or other disposition will
generally be ordinary gain or loss. Investors should consult
their own tax advisors
concerning the federal income tax consequences of an ELN
investment.
An increasing number of Equity Linked Notes are being issued
and listed on exchanges.
There are many different names for Equity Linked Notes, and
each brokerage firm uses
it’s own acronym when listing such structures. Although some
may have slightly different
characteristics, i.e., some have interim coupons, some don’t
provide full protection, some
have participation rates less than 100%, most follow the
general ELN structure.
- SUNS: Stock Upside Note Securities (Lehman Brothers)
- MITTs: Market Index Target-Term Securities (Merrill Lynch & Co., Inc.)
- ELKS: Equity-Linked Securities (Salomon Brothers, Inc.)
- SIGN: Stock Index Growth Notes (Goldman, Sachs & Co.)
- Stock Index Return Securities (Paine Webber Group Inc.)
Factors Affecting the Value of ELNs before
Expiration
The interim performance of the ELN is contingent on the
contributions of the underlying
economic components: the long bond and long equity call
positions. The long bond
component rises (or falls) when interest rates decrease (or
increase); the equity
component declines (or rises) in connection with declines (or
rises) based on the
underlying equity; time to maturity; volatility and interest
rates. Also, a rise (or decline) in expected
dividend payout of the underlying equity would decrease (or
increase) the call option value. Figure 5
summarizes the effect on the different factors that affect the
bond and the call on the ELN price.
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Summary
Most investments that offer a
significant upside opportunity also involve significantly
more
risk. Equity-Linked
Notes combine the principal protection feature of traditional fixed
income
assets with the higher
return potential of equity assets. They allow investors
to
avoid falling into
either too-risky or too-low return investments.
The interim performance of an ELN
is contingent on the contributions of the
underlying
economic components:
the long bond and long equity call positions. These
components
are affected by changes
in the underlying equity price, volatility, interest rates, time
to
expiration, dividend
yield and issuer credit rating.
The strategy may be appropriate for
conservative and risk-averse equity investors or
fixed
income investors with a
long-term bullish view on the equity market.
In fact, those equity
index structured fund that appeared in China A-Share are form of
Equity-Linked Notes (ELN). By studying the Payoff
of
泰达稳健（Senior
Tranche)
, there is no
participation of the CSI 500 index, but has fixed income return of
1 year deposit rate + 3.5% per year. By studying the Payoff
of
泰达进取（Equity Tranche)
, there is 200%
participation of the CSI 500 index.
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