FTSE Income, considering the optionsMarch 06, 2015 - 15:16
With pension freedoms imminent and interest rates
steadfastly low the search for yield continues.
We are proposing a private placement that gives investors a
high chance of a strong income as well as offering a robust capital protection
in most foreseeable situations:
UK Phoenix Autocall:
Max Term: 6yrs
Income: 1.625% per quarter, provided the UK index is above
70% of initial level (4865 at current levels)
Autocall level: 100% from 18 months
Capital protection barrier: 70% European
We think the analysis speaks for itself; figures that stand out are:
- Historic return of 5.9% and a volatility of returns of 0.5% (annualised)
- In stress-testing, which includes catastrophe scenarios, the volatility remains low at 5.4% annualised with an expected return of 4.7% per annum
Click here to see the report in full.
As well as offering a diversified source of income, the product offers a really interesting hedge against interest rate movements upwards in that if equity markets continue to grow in the next 18 months the chances of an interest rate increase go up.
At this point the product will return capital to investors allowing them to reinvest in what might be a more favourable fixed income pricing environment. On the downside even if yields rise thanks to say 20% a fall in equity markets investors will continue to receive a higher income as well as protection at maturity.
Structured products offer investors the opportunity to sell
long-dated options without facing margin calls that makes such trades
unattractive for both buyer and seller.
No surprise then that when he was able
to take advantage of being able to sell long dated risk without the potential
for margin calls, Warren Buffett, jumped at the chance although he has made it
clear that he will not expose Berkshire to the risk that some catastrophic
event might require it to post collateral without warning. And with that security in mind he chose to receive less premium than he might otherwise (read
here for more details: http://ftalphaville.ft.com/2013/12/19/1729152/the-buffett-difference-derivatives-edition).
Having secured the premium for selling out-the-money
put options, Cube investigates the best strategy to put this money to
work to maximise the potential income for the least risk. We found, for example in the above trade that 70% offered the maximal coupon barrier for the
return and that 18-months is the call date that offered the highest potential
Simon has over 10 years’ structured investments experience, helping to develop the industry’s leading data and news service with senior roles in London and HK. He subsequently joined EFG Financial Products (Leonteq) before founding consultancy, Mu Capital. He writes and speaks extensively on structured investments, recently contributing the European chapter to Structured Products: Evolution and Analysis, published by Incisive Media.