Equity-linked Notes (ELN)

[greengiraffe]

Ultimate Private Banking con job...

More often than not get strike in. Returns expressed in annualised terms.

Been there, done that. Most clients got strike in don't see day light for long time.

The type of ELNs my company invests in is basically writing of put options on a basket of stocks.
The key components of ELNs is
1)underlying stocks
2) Strike value
3) Knock off value
4) Duration of the contracts - one month, 2 month and so on
5) most importantly, the "vol" of the market on date of committment

Usually, investors will leverage to buy ELNs so as to maximise the yield...

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there are many ELN, i think it should be quite save for those ELN link to Singapore blue chip stock.
If it hit my strike price, the most i hold the stock, if it did not hit my strike price, i will earn much higher interest compare to fixed deposit.

i found that the strike price is not not i want. Do banks have ELN during bear market? Who is actually the counter party? Is it the bank or third party?

YES, yield is at its highest during bear market. But you need lot of balls to do it during such market.
I was told in 2008, the yield on US banks stocks was 40% with 70% strike price. haha!

Banks are either the counter party or acting as middle man for another bank.

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there are many ELN, i think it should be quite save for those ELN link to Singapore blue chip stock.
If it hit my strike price, the most i hold the stock, if it did not hit my strike price, i will earn much higher interest compare to fixed deposit.

Try US banking stocks for higher yield.
Yield on SG stock is depressingly LOW...

[AlphaQuant]

Usually, investors will leverage to buy ELNs so as to maximise the yield...

good ol' "i-kill-you-later"

[camelking]

Usually, investors will leverage to buy ELNs so as to maximise the yield...

good ol' "i-kill-you-later"

Well, most investors went in with their eyes wide open.........

The key is to understand the risks involved...i mean FULLY understand. Work out the worst case scenario and if you can take it....the upside will take care of themselves...

[Temperament]

i found that the strike price is never "attractive" for ELN on local Blue Chips. i understand the bank who offers the ELN usually has a third party. So that either way the bank makes money.

[AlphaQuant]

Well, most investors went in with their eyes wide open.........

The key is to understand the risks involved...i mean FULLY understand. Work out the worst case scenario and if you can take it....the upside will take care of themselves...

oh i agree - in fact i am all for exotics (that is my profession!)

the problem is that most people do not understand the power of leverage and also that people normally have too much confidence in their perceptions ("I am always right!!"). Sadly, the time when they realise that they are wrong is when they get hit twice as hard (or even thrice if they are leveraged 3 times!!) and then comes denial and the inability to cut loss.

the only thing i do know, is that i do not know everything.

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i found that the strike price is never "attractive" for ELN on local Blue Chips. i understand the bank who offers the ELN usually has a third party. So that either way the bank makes money.

local blue chips trade with an implied vol of ard 30+ (unless it is deeply otm where the skew is pronounced). I actually find the strikes decent in absolute terms but of cos you can get better strikes on other counters (but of cos these come with much higher volatility and hence even greater uncertainty). In general - u get what u pay for - the "better" the strike, the "riskier" it is.

it is true that most local banks back out the structures to the bigger international players - essentially the local banks make money off the spread (difference between the cost from the final hedger and the price to the investor). The bank does not take the hedging risks but it does take the credit risk between the end-investor and the end-hedger.

[freedom]

correct me if I am wrong. ELN is a typical limited upside, unlimited downside instrument. You can't call the underlying equity even if it shoots through the sky. You can lose everything when the underlying equity goes to 0.

[camelking]

correct me if I am wrong. ELN is a typical limited upside, unlimited downside instrument. You can't call the underlying equity even if it shoots through the sky. You can lose everything when the underlying equity goes to 0.

can't say it has unlimited downside...your losses is limited by the value of equity bought at strike price

[arthur]

I have nothing else to add except that I concur with almost everyone's statement here.

Don't touch even if you think you know or your banker tells you that its absolutely safe.
Nothing is safe, not even Fixed deposits if the bank collapsed and government refuse to honour its guarantee.

This ELN is an option. There is always a counterparty opposite whenever you buy instrument.
How would you know that the counterparty has no prior knowledge that their bet is correct? You could be betting against the investment banks, fund managers who have more resources and connections than yourself.
Could you tell yourself you know better than the counterparty? Unless you can confidently tell yourself this, otherwise hands off.

I strongly discourage leverage on these financial instruments as a wrong step will bring untold misery onto not only onself but the loved ones around us.

[Temperament]

I have nothing else to add except that I concur with almost everyone's statement here.

Don't touch even if you think you know or your banker tells you that its absolutely safe.
Nothing is safe, not even Fixed deposits if the bank collapsed and government refuse to honour its guarantee.

This ELN is an option. There is always a counterparty opposite whenever you buy instrument.
How would you know that the counterparty has no prior knowledge that their bet is correct? You could be betting against the investment banks, fund managers who have more resources and connections than yourself.
Could you tell yourself you know better than the counterparty? Unless you can confidently tell yourself this, otherwise hands off.

I strongly discourage leverage on these financial instruments as a wrong step will bring untold misery onto not only onself but the loved ones around us.

But if i can find , let's say for example SPH as ELN and its strike price is what i may buy in the market, can you tell me where the danger lies? Is it the third party may not honour the contract or more other dangers? But so far don't think i can find an agreeable strike price besides the interest rate may not be that attractive too. Assuming no leverage is used, what are the dangers or risks?

[AlphaQuant]

But if i can find , let's say for example SPH as ELN and its strike price is what i may buy in the market, can you tell me where the danger lies? Is it the third party may not honour the contract or more other dangers? But so far don't think i can find an agreeable strike price besides the interest rate may not be that attractive too. Assuming no leverage is used, what are the dangers or risks?

if you are investing with a view that when the price at maturity is below the strike price, you will hold the underlying happily, then i think the main thing is to make sure that you read the terms of the contract carefully - making sure that on maturity, the payoff is not cash settlement and rather, you want physical delivery of the underlying stock. The former locks in your losses at maturity in cash terms whereas the latter gives you the stock. I am under the impression that most offer cash-settlement i/o physical delivery but it depends on who you are dealing with.