Cube Reports 2.0: risk three waysOctober 01, 2014 - 16:07
The latest iteration of the CUBE Reports been deployed for the Dual Defensive Boosted Kick Out. It conveys more information about the potential rewards and risks that clients face and presents the analysis from InvestmentProductResearch.com in a way that will allow investors to understand structured investments with unprecedented clarity.
For Cube’s Dual Defensive Boosted Kick Out the summary analysis in the report shows that:
- The overall average return from IPR’s simulations is 6.7%
- There is a 93.6% chance of a gain, and that the simulated gain is on average 8.6% (This is in line with the back-test result)
- There is a 5.8% chance of no gain or loss
- There is a 6.4% chance of a loss
This analysis of the chance and scale of gains and losses is designed to help investors understand the nature of the investment.
The simulated results from IPR draw on historic data to create millions of potential scenarios and tend to paint a gloomier picture than a simple back test, but we think that this broader and more in-depth analysis is a better way to illustrate the risk profile of investments.
We have divided the risk metrics into three parts in order to communicate clearly a range of risk types to variety of investors. many of whom have different understandings of what risk means.
We calculate the volatility of returns for the Dual Defensive Boosted Kick Out October 2020, and use this value to place the Note onto the three main volatility-based, attitude-to-risk scales.
Volatility itself: 16.8%, so on this measure the Note is less risky than a direct equity investment
Cube Risk – SRRI: the Note has a score of 6.2 on the 1 to 7 scale used by all funds in the Key Investor Information Document
- 1-10 Scale: the Note has a score of 6.4 on the 1 to 10 scale used by many advisers
These volatility-based measures can be used to help compare the Dual Defensive Boosted Kick Out October 2020 to other investments and to measure its suitability for particular clients.
Although volatility has become a byword for risk to many financial professionals, many investors understand risk to mean the potential loss they might make from an investment. Our loss measures can be used to match a Note against an investor’s capacity for loss. We’ve presented risk-of-loss figures for the Dual Defensive Boosted Kick Out October 2020 below:
There is a 6.4% chance of a loss, suggests the IPR research (this contrasts with the 0.8% of times that the product made a loss, historically)
- If there is a loss, then the loss is expected to be -11.5% per annum, and the maturity value is expected to be 47.9% on average.
We show the credit ratings and CDS for Morgan Stanley, the issuer. We also show the probability, calculated by Bloomberg, that the issuer will default over the next 12 months. In this case, Bloomberg calculates this to be just 0.08% - that means the chance of default is about once every 1,250 years.