An Introduction to Cube ReturnJune 16, 2014 - 14:53
One of the main outputs of Cube Research is our Cube Return score. This is a measure of the average returns that a product may offer in the future. We calculate this as an annualised percentage return. This means that the Cube Return is a value that allows you to compare the return of a structured product with the return of another structured product, or with a fund or other investment.
We calculate the Cube Return for every product every week. Before a product strikes the Cube Return score will be stable. After the strike date the Cube Return will be more volatile because it will take into account the current value of the product and the performance of the underlying assets.
We base our Cube Return score on a wide range of potential market outcomes. None of us know what is going to happen in the future, so we simulate the way that the underlying assets may behave in the future based on how they have performed in the past. This allows us to stress test the product, and provide an estimate of the scale and probability of returns that you may receive in the future. The stress testing process allows us to calculate how likely it is that a product will kick-out early, or how likely it is that barriers will be breached and to what extent the maturity value will be more or less than the face value of the note. As all our simulations are based on data going back to the same date at the end of 1992, Cube is confident in the consistency and range of its data.
Reality will be Different
You should note at this stage that the return you receive will almost certainly be greater or less than our Return score. Cube Return is simply an annualised average of an investment’s potential returns. Also, while it provides an understanding of the returns of an investment our Cube Risk score is a measure of the risks you are taking to your capital.
When we look at what may happen there will be a wide range of possible returns depending on the design of each product. Many products can mature early, others may have coupons that are conditional on the underlying assets remaining above a set level. We calculate the how likely each event is, and the payoff that you would receive from each simulation. Our Cube Return Score is the probability-weighted average payoff discounted by the probability weighted average term.
It is important that investors understand the return that they can expect to get from a product. The Cube Return score is an attempt to estimate the annualised returns that an investor would have received on average if they had invested in a structured product, both historically and in millions of other potential scenarios. We have calculated it in a way that it can be compared easily with the expected return from other assets, markets or funds. Click here to find more details about Cube Return and how it is calculated.