BANQUE DE LUXEMBOURG
Investing in structured products Which one is right for you?
INVESTING IN STRUCTURED PRODUCTS I 1
BANQUE DE LUXEMBOURG
Whether they are based on stock market indices, equities, interest rates or other financial instruments, structured products have become an integral part of an investment portfolio, because they enable investors to take a multitude of positions while modulating the risk they take. There is a wide range of structures offering active management and strong performance. Banque de Luxembourg has a team dedicated to the development and follow-up of these products. Based in our dealing room, these experts trade all types of instruments (equities, fixed-income, currencies, etc.) and create, depending on market opportunities, innovative products that meet the needs of the most diverse investment strategies. Pierre Stoll, Structured products manager at Banque de Luxembourg
This brochure presents the various categories of structured products regularly offered by Banque de Luxembourg. Your investment advisor can provide information on the products and series currently open for subscription.
What is a structured product? A structured product is a financial instrument that allows you to benefit from variations in a highly diversified array of underlying assets (equities, indices, fixed-income securities and commodities), while optimising the risk you take, owing to the use of derivative products (options, futures, etc.).
INVESTING IN STRUCTURED PRODUCTS I 3
BANQUE DE LUXEMBOURG
What are the questions you should ask yourself before investing in structured products?
What types of structured products does Banque de Luxembourg propose?
Structured products are very diverse and in some cases have become very complex, so you should examine all components of the planned investment. The principal factors that will inform your choice of product are as follows:
Our menu of structured products evolves depending on market opportunities and is organised into four distinct categories in terms of risk and expected return. You will find a description of them in the pages that follow.
• The underlying One of the advantages of structured products is that they enable you to invest in markets that are generally difficult to access through individual lines, such as copper or renewable energy sources.
Depending on the size of your investment portfolio, our specialists can create bespoke innovative products in line with your desired yield, your sensitivity to risk and your anticipation as to the performance of the underlying.
• The degree of risk The most defensive structured products are those that promise to protect your initial investment at maturity while accessing markets that are riskier than simple bond investments. If you are willing to assume additional risk, other products offer full participation in the performance of the underlying, but without such guarantees.
• Your investment objective with respect to the performance of the underlying There is a structured product to capitalise on every expected underlying performance. Whether you expect the instrument to rise, fall, or remain neutral, it is always possible to build a product that will give you exposure to your anticipated performance.
Leverage Performance Yield Enhancement
RISK
• The recommended investment period Products offering a capital guarantee generally have a maturity of two to six years. They are the ideal solution for benefiting from the expected direction of a market or of a particular financial instrument in the medium to long term. More aggressive products, in the “Protection”, “Yield enhancement”, “Performance” or “Leverage” categories generally have shorter maturities of one to three years.
THE CATEGORIES COMPRISING THE BANK’S STANDARD SELECTION OF STRUCTURED PRODUCTS
Protection
RETURN
INVESTING IN STRUCTURED PRODUCTS I 5
BANQUE DE LUXEMBOURG
Protection 200 180 160 140
OUR FOUR CATEGORIES OF STRUCTURED PRODUCTS
120 100 80 60 40 20 0 -100 %
Product -50 %
0%
50 %
100 %
Underlying
“Protection” products offer a partial or total guarantee of principal at maturity and target a yield in excess of the bond market by taking advantage of the potential of a riskier underlying asset or assets. They are for you if you are looking for… a defensive investment that aims to protect your principal while offering you (partial or full) participation in the performance of generally riskier underlyings. The limits of this type of investment During its lifetime, the value of this product may fall below the amount initially invested. You must therefore verify that your investment horizon is compatible with the maturity of the product, because your capital is guaranteed only at maturity. You cannot change the underlying, which remains the same throughout the life of the product. RISK PROFILE conservative
YOUR VIEW OF THE UNDERLYING bearish stable
INVESTMENT HORIZON short medium
speculative
bullish
long
INVESTING IN STRUCTURED PRODUCTS I 7
BANQUE DE LUXEMBOURG
Example: capital guaranteed certificates “Capital guaranteed certificates” allow you to participate in the performance of a risky asset, according to a pre-determined set of conditions. The degree of participation depends on a certain number of parameters inherent to the underlying. These parameters include the volatility and dividend yield of the underlying, amongst others. The terms of your participation in the performance of the underlying vary from one product to another. The issuer guarantees repayment at maturity of all or part of the initially invested capital.
Yield Enhancement 200 180 160 140 120 100 80 60 40 20 0 -100 %
Example Underlying: EuroStoxx50 index Protection: 100% Upside participation in the performance of the underlying: 80% Exercise price (initial value of the underlying): EUR 5,000 Maturity: 5 years Initial investment: EUR 1,000 Depending on the value of the underlying at maturity, repayment will be calculated as follows:
REPAYMENT AT MATURITY
1400
• If the value of the underlying at maturity is EUR 4,000 (= 80% of the initial value): its price is below its initial value. But since the invested capital is guaranteed, the investor recovers his entire principal. Repayment will therefore be EUR 1,000.
1200
• If the value of the underlying at maturity is EUR 6,000 (= 120% of the initial value), the investor receives his initial principal (EUR 1,000), plus a pre-determined participation (80% in this example) in the positive performance of the underlying. The investor therefore receives EUR 1,000 + 80% of 20% = EUR 1,160.
1000
800
Product -50 %
0%
50 %
4000
5000
6000
PRICE OF UNDERLYING AT MATURITY Product
Underlying
“Yield enhancement” products offer a potentially higher yield – over a defined period – in the event the value of the underlying stagnates. This excess yield can be obtained through high coupons or the purchase of securities at a price significantly below that of the market (“discount”). They are for you if you are looking for… a yield significantly higher than that of the bond market. The maximum return is known from the outset. In the event the underlying declines, the coupon or the discount cushions the potential loss. The limits of this type of investment This product does not offer a principal guarantee. A sharp decline in the underlying will lead to a significant loss in the capital you have invested. Moreover, the investor does not participate in the underlying asset’s potentially higher performance. RISK PROFILE conservative
YOUR VIEW OF THE UNDERLYING stable bearish 600 3000
100 %
speculative
bullish
7000
INVESTMENT HORIZON short medium
long
Underlying
INVESTING IN STRUCTURED PRODUCTS I 9
BANQUE DE LUXEMBOURG
Example: the discount certificate The investor does not receive any dividends that might be paid on the underlying; instead these go to finance the discount. To increase the degree of protection offered by a “discount certificate” in the event of a correction affecting the underlying, an additional “protective barrier” can be set up. At maturity, the certificate is repaid in cash at the underlying’s initial price, provided the price of the underlying has not reached the barrier during the life of the product.
Example Underlying: France Telecom Exercise price (underlying’s initial value): EUR 20 “Discount” factor: 110% Maturity: 1 year Initial investment: EUR 1,000 Maximum repayment (cap): EUR 1,100 (110%) Investing directly in the underlying, the investor can buy 50 shares (1,000 / EUR 20), whereas if he invests in the discount certificate, he can buy 55 shares (50 x 110%).
Depending on the value of the underlying at maturity, repayment will be calculated as follows: 26
REPAYMENT AT MATURITY
A “discount certificate” is an investment in an underlying at a price below its market quote. This price difference, called the “discount”, makes it possible for the investor to achieve a surplus return provided the price of the underlying fluctuates in a narrow range. This type of product generally has a relatively short life span, in the region of two years.
• If the value of the underlying at maturity is identical to the initial price (EUR 20 in this example), the value of the certificate is EUR 1,100 (55 x EUR 20), which corresponds to the initial investment plus the gain due to the discount. 22
• If the value of the underlying is higher (e.g. EUR 22), the value of the certificate is theoretically equal to EUR 1,210 (55 x EUR 22), which is higher than the agreed-upon maximum repayment of EUR 1,100.
Discount
The value of the certificate is therefore limited to EUR 1,100.
18
• If the value of the underlying is less (e.g. EUR 18.18), the investor receives around EUR 1,000 (55 x EUR 18.18). Even though the value of the underlying is less than its initial value, the discount certificate does not suffer a loss. 14 14
18
22
PRICE OF UNDERLYING AT MATURITY Discount certificate
26
It is only below EUR 18.18, the price at which the “discount” is fully “absorbed”, that the performance is negative.
Underlying
INVESTING IN STRUCTURED PRODUCTS I 11
BANQUE DE LUXEMBOURG
Example: the sweet reverse convertible Even if the barrier is reached during the life of the product, the repayment is the same provided the underlying’s price at maturity is greater than or equal to its initial price. On the other hand, the investor will be repaid in securities if the barrier is reached during the life of the product and the underlying’s price at maturity is less than its initial price. In this case, the coupon cushions the capital loss suffered on the underlying. This type of product generally has a relatively short maturity, in the region of one or two years.
Example Underlying: France Telecom Exercise price (underlying’s initial value): EUR 20 Coupon: 10% Barrier: EUR 16 Maturity: 1 year Initial investment: EUR 1,000 The coupon paid at maturity is worth EUR 100 (EUR 1,000 x 10%). .
Depending on the value of the underlying at maturity, repayment will be calculated as follows: 26
REPAYMENT AT MATURITY
A “sweet reverse convertible” is linked to a specific security and offers a guaranteed coupon yield in excess of the money market rate. The coupon is always paid at maturity. This product makes use of a barrier that offers protection against negative performance in the underlying. At maturity, the investor receives a cash payment equal to his initial investment plus the amount of the guaranteed coupon so long as the barrier is not reached.
• If the barrier is not reached the investor recovers his initial investment (EUR 1,000) plus the agreed-upon coupon of 10% (EUR 100), regardless of the level of the underlying. 22
• If the barrier is reached and the price of the underlying at maturity is higher than its initial level (e.g. EUR 22), the investor automatically receives EUR 1,100 (investment + coupon).
Coupon
• If the barrier is reached and the price of the underlying at maturity is less than its initial price (e.g. EUR 18) the protection offered by the barrier is no longer in effect and repayment is made in shares plus the coupon. The investor receives 50 shares and EUR 100 (the fixed coupon), equivalent to a total repayment of EUR 1,000.
18
14 14
18
22
26
PRICE OF UNDERLYING AT MATURITY Sweet reverse
Underlying
INVESTING IN STRUCTURED PRODUCTS I 13
BANQUE DE LUXEMBOURG
Performance
Example: the tracker
200 180 160 140 120 100 80 60 40 20 0 -100 %
Product -50 %
0%
50 %
100 %
Underlying
This type of product not only follows precisely the movement of the underlying to which it is indexed, but also provides access to instruments or indices that are not directly tradable or are illiquid, such as baskets of equities or stock market indices. Investing in a stock market index through a tracker is equivalent to investing in an equities mutual fund that mirrors the composition of the index.
The advantage of a tracker is that with a smaller initial outlay than would be necessary for a direct investment, you can invest in a diversified portfolio. To minimise the amount to be invested, each certificate is generally tied to a fraction of the index it is supposed to represent. By definition, a product of this type has no pre-determined maturity.
“Performance” products offer potential for attractive yields. They generally cover asset classes that are difficult to access directly (using for example, indices and baskets of equities): the commodities market is one such example.
Example They are for you if you are looking for… a boost in yield within a defined range of fluctuation and you believe it is unlikely the valuation will fall below a specific threshold. Above the defined range, you participate in 100% of any increase.
Underlying: EuroStoxx50 Initial value of the index: EUR 5,000 Ratio: 10:1 Initial value of a certificate: EUR 500 Initial investment: EUR 1,000
The limits of this type of investment There is no capital guarantee or guaranteed coupon yield. If the underlying declines below the defined range of fluctuation, you are fully exposed thereto.
YOUR VIEW OF THE UNDERLYING bearish stable
speculative
VALUE OF THE UNDERLYING
RISK PROFILE conservative
The value of a tracker is tied directly to that of its underlying index. 1500
• If the index climbs to EUR 5,500 (+10%), the value of the certificate also increases by 10% and will be EUR 550. The initial investment will rise to EUR 1,100.
1000
• If the index declines to EUR 4,000 (-20%) the value of the certificate declines similarly and will be EUR 400. The investment will fall to EUR 800.
500
0
For this type of product, it is therefore quite straightforward to calculate the value of a certificate at any point in time.
-500
-1000
bullish -1500 3500
INVESTMENT HORIZON short medium
long
4000
4500
5000
5500
6000
6500
CHANGE IN VALUE OF THE UNDERLYING Tracker
Underlying
INVESTING IN STRUCTURED PRODUCTS I 15
BANQUE DE LUXEMBOURG
Example: the bonus certificate At maturity, there are three possible scenarios: // If the price remains within the range and has never traded at or below the protective barrier, repayment is equal to the bonus, which corresponds to the value of the predetermined bonus level. // If the underlying closes above the bonus level, and has never traded at or below the protective barrier, the investment also corresponds to a direct investment. At maturity, there will be a one-to-one correspondence between the valuation of the product and that of the underlying. // If, during the life of the product, the protective barrier is reached, the investment will correspond to direct investment: in this case, the bonus level is no longer applicable.
Example Underlying: Deutsche Bank Initial price: EUR 100 Protective barrier: EUR 85 Bonus level: EUR 115 Initial investment: EUR 1,000 Depending on the value of the underlying asset at maturity, repayment will be calculated as follows: 140
• If the price of the underlying is within the protection range (i.e. between EUR 85 and EUR 115) and has never reached the protective barrier, the investor receives his initial investment plus the bonus, for a total of EUR 1,150.
130
REPAYMENT AT MATURITY
A “bonus certificate” offers a certain degree of protection compared with a direct investment in the selected underlying, because it offers a surplus yield during any periods of stagnation. The amount of the surplus yield is known in advance and corresponds to the defined “bonus”. Payment of the bonus depends on the movement of the underlying within a range whose upper and lower limits are determined (protective barrier and bonus respectively) when the product is issued.
120 110
• If the protective barrier is never reached and the underlying closes above the bonus level, the investor receives 100% of the performance. If the value at maturity is EUR 130, repayment will be EUR 1,300.
100 90
• If the protective barrier has been reached at any point during the life of the product, the investor is exposed to 100% of the variation. For example, if the value of the underlying at maturity is EUR 70, repayment will be EUR 700. Conversely, if the value at maturity is EUR 130, repayment will be EUR 1,300.
80 70
This type of product generally has a relatively short life span, in the region of one to two years. The investor does not receive the dividends paid on the underlying, which are used to finance the protection.
60 60
70
80
90
100
110
120
130
140
PRICE OF UNDERLYING AT MATURITY Bonus
Underlying
INVESTING IN STRUCTURED PRODUCTS I 17
BANQUE DE LUXEMBOURG
Leverage
Example: the mini-long
200
Products in the “Leverage” category generally present a much higher level of risk than other product categories. They make use of a multiplier effect to amplify the price fluctuations of the underlying (both up and down). As a result, their valuation can, in theory, fall rapidly to zero for a relatively gentle decline in the underlying.
180 160 140 120 100 80 60 40 20 0 -100 %
As the change in value of the product is 100% aligned with that of the underlying, the leverage effect offers, for a lower initial outlay than a direct investment would require, an identical return in terms of the absolute gain or loss. Although its lifetime is generally unlimited, a minilong product is always accompanied by a stop-loss provision that triggers a sale so as to minimise losses. As soon as this minimum valuation threshold is reached, an accelerated repayment of the product is initiated.
Product -50 %
0%
50 %
100 %
Underlying
“Leverage” products unleash a multiplier effect on the performance of an underlying asset, thereby amplifying both upward and downward movements. They are for you if you are looking for… a gain well in excess of a direct investment in the underlying, if the price of the underlying rises. The limits of this type of investment You enjoy neither a guarantee of capital nor a guaranteed coupon yield. If the underlying declines in price, the leverage accentuates your loss, which becomes much greater than what you would have suffered through a direct investment in the same instrument.
Example Underlying: Deutsche Bank Initial price: EUR 100 Initial exercise price: EUR 80 Stop-loss: EUR 82 Initial value of a certificate: EUR 20 Initial investment: EUR 1,000 The initial investment can buy 10 shares in the underlying, whereas the mini-long offers an exposure to 50 shares. At the outset, the product has a leverage of 500%. The value of the investment over the life of the product is calculated as follows (in the interest of simplicity, variations in the exercise price have been ignored):
RISK PROFILE conservative
YOUR VIEW OF THE UNDERLYING bearish stable
INVESTMENT HORIZON short medium
speculative
bullish
VALUE OF THE INVESTMENT
140
130 120
• If the price of the share rises to EUR 105, the value of the certificate will be EUR 25 (EUR 105-80) and repayment will be EUR 1,250 (50 x EUR 25)
110
• If the price of the share declines to EUR 85, the value of the certificate will be EUR 5 (EUR 85 - 80) and repayment will be EUR 250 (50 x EUR 5)
100 90
• If the price of the share declines to EUR 82 it reaches the stop-loss. The value of the certificate is then EUR 2 (EUR 82 - 80) and the investor receives an accelerated repayment totalling EUR 100.
80 70
60 60
70
80
90
100
110
120
130
140
long PRICE OF UNDERLYING AT MATURITY Mini-long
Underlying
INVESTING IN STRUCTURED PRODUCTS I 19
This brochure has been prepared solely for informational purposes and shall in no event be considered a solicitation to buy or an offer to sell a security or any other financial instrument. Any subscription or purchase decision and any decision to enter into a relationship must be taken strictly on the basis of official documentation.
The securities referred to in this document may cause you as an investor to incur significant risk and may not be appropriate to all investors. Specifically, these risks might result from high volatility or involve market, default, credit, liquidity, exchange-rate or interest-rate risks. There is no guarantee that the securities described in this document will achieve their investment objectives. As a potential investor, you must ensure that you understand the risks involved in an investment in these securities and must not take any investment decisions until you have given careful consideration, with the help of your professional advisors, to the appropriateness of these products to your specific financial situation, that takes into account, in particular, legal, tax and accounting aspects.
We have made every effort to verify that the information presented in this document is correct, in particular the estimated values, opinions and other estimates. Nevertheless, we offer no guarantee as to the validity, timeliness, completeness, correctness or accuracy of the information, which is provided purely for informational purposes. This information may be amended without prior notice.
BL-Contact T (+352) 26 20 26 60 Monday to Friday from 7.30am to 6pm
F (+352) 49 924 55 99 E
[email protected] www.banquedeluxembourg.com
