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Equity Linked Notes

Introduction

Equity Linked Notes (“ELN”) are debt securities issued by large international financial institutions under a Debt Issuance Programme in the form of Euro Medium Term Notes. Depending on the performance of underlying equities, at maturity, investors may redeem the full principal amount plus the predefined return, or redeem by taking delivery of the physical underlying equity shares at the defined strike price set at the beginning of investment. These ELN are sold via private placement channel and may not be suitable for retail investors.

At Chief Securities, we provide various types and structures of Equity Linked Notes. Below are two commonly seen ELN. Please click the button to obtain further information:
  • High Yield Notes
  • Knock Out High Yield Notes

High Yield Note

A High Yield Note is a simple equity linked product in which investors could buy the underlying securities at a discounted price compared to the market trading price / PAR value. This discount is actually generated by investors' selling of a put option. The strike level / discount level and the maturity date of the note can be customized.

At maturity, if the underlying share closes above the strike level, investors will redeem at the PAR value of the Notes, or if the underlying share closes below the strike level, investors will redeem the Note by taking delivery of the linked underlying shares at the strike price.

Underlying stock price at Maturity Redemption scenario at Maturity
At or Above the pre-defined Strike Price 100% of the Denomination in Cash
Below the pre-defined Strike Price Receive the Shares at Strike Price (Number of shares = Denomination / Strike Price)

High Yield Notes can be considered as an alternative to listed Put Options as long as the underlying securities do not rise too much.

THIS IS NOT A PRINCIPAL PROTECTED PRODUCT. INVESTORS MAY LOSE 100% OF THEIR CAPITAL INVESTED.

Hypothetical Example:

1 Month 37.63%p.a. Bull High Yield Notes linked to XYZ share

Underlying Security XYZ share listing on a major exchange
Tenor 30 Days
Trade Date / Initial Valuation Date 1 August 2009
Final Valuation Date 31 August 2009
Denomination per Note HK$100,000
Strike Price of the Company XYZ share $95
Spot Price of Company XYZ share $100
Issue Price 97% of the Denomination per Note
Amount that investor need to pay at Settlement Date 97% x $100,000 = $97,000
Redemption possibilities at maturity:

1. XYZ share closed at $97 (i.e. At or Above the Strike Price of $95)

  • Each Note holder will redeem the Note in Cash equal to 100% of the Denomination $100,000.
  • A gain of $3,000 per Note or 37.63% p.a. ($3,000 / $97,000) * (365 / 30)
  • Compared to Direct Investment = A loss of $3,000
Example 1
Stock closes above Strike. Investor receives $100,000 per Note.

2. XYZ share closed at $105 (i.e. At or Above the Strike Price of $95)

  • Each Note holder will redeem the Note in Cash equal to 100% of the Denomination $100,000.
  • A gain of $3,000 per Note or 37.63% p.a. ($3,000 / $97,000) * (365 / 30)
  • Compared to Direct Investment = A gain of $5,000
Example 2
Stock closes above Strike. Investor receives $100,000 per Note.

3. XYZ share closed at $80 (i.e. Below the Strike Price of $95)

  • Each Notes holder will redeem the Notes by taking physical delivery of XYZ share at $95 per share.
  • A total number of 1,052 XYZ shares. ($100,000 / $95). And a cash of remaining $60.
  • Market value of 1,052 XYZ share = $84,160 ($80 x 1,052)
  • A loss of $12,780 per Note ($97,000 - $84,160 + $60)
  • Compared to Direct Investment = A loss of $20,000
Example 3
Stock closes above Strike. Investor receives $1,052 XYZ shares per Note.

*   These calculations have not yet taken into account any commission and transaction costs.

High Yield Note Calculator

Please input the corresponding values in the yellow colored field.

Denomination
Underlying Spot Price
% of Strike
Underlying Strike Price
Issue Price
Amount need to pay at Settlement Date
Final Underlying Price
Days to maturity
Number of shares each Contract represents

Result
Receive Cash or Physical Share?
Amount received at Maturity, if Cash
Number of Shares received
Potential Yield p.a.

*   For reference only

Knock Out High Yield Notes Education

Knock Out High Yield Notes are very similar to simple High Yield Notes in that investor could buy the underlying securities at a discount price compared to the market trading price / PAR value with an additional feature of early redemption. This discount is actually generated by investors selling a put option. The strike level / discount level, Knock Out Level and the maturity period can be customized.

Knock Out Condition: If the underlying share is traded or closes (depending on what the product is) at or above the Knock Out Level, the Notes will be early terminated and investor will redeem the Notes at the PAR value. Hence, the earlier the knock out, the higher the return.

At maturity, if the Note is not redeemed early, and if the underlying share is closed above the strike level, investor will redeem at the PAR value of the Notes, or if the underlying securities is closed below the strike level, investors will redeem the Notes by taking delivery of the linked underlying shares at the strike price.

Underlying stock price traded at or above Knock Out level Early Redemption, receive 100% of the Denomination in Cash
Underlying stock price at Maturity Redemption scenario at Maturity
At or Above the pre-defined Strike Price 100% of the Denomination in Cash
Below the pre-defined Strike Price Receive the Shares at Strike Price (Number of shares = Denomination / Strike Price)

This Knock Out High Yield Note can be considered as an alternative to listed Call Options if the underlying securitiesis is expected to rise.

THIS IS NOT A PRINCIPAL PROTECTED PRODUCT. INVESTORS MAY LOSE 100% OF THEIR CAPITAL INVESTED.

Hypothetical Example:

1 Month 37.63%p.a. Knock Out Bull High Yield Notes linked to XYZ share

Underlying Security XYZ share listing on a major exchange
Tenor 30Days
Trade Date / Initial Valuation Date 1 August 2009
Final Valuation Date 31 August 2009
Denomination per Note HK$100,000
Knock Out Price HK$105
Strike Price of the XYZ share $95
Spot Price of XYZ share $100
Issue Price 97% of the Denomination per Note
Amount that investor need to pay at Settlement Date 97% x $100,000 = $97,000
Early Redemption (Knock Out) before maturity:

1. XYZ share traded / closed at or above $105 (i.e. At or Above the Knock Out level) 5 days after the trade date.

  • Each Note holder will redeem the Note in Cash equal to 100% of the Denomination $100,000.
  • A gain of $3,000 per Note or225%p.a. ($3,000 / $97,000) * (365 / 5) = 225%p.a.
Example 1
XYZ traded above $105 (knock Out level). Investor receives $100,000 per Note.

Redemption possibilities at maturity (i.e. NOT Knock Out before):
1. XYZ share closed at $97 (i.e. At or Above the Strike Price of $95 but below the Knock Out level $105)
  • Each Note holder will redeem the Note in Cash equal to 100% of the Denomination $100,000.
  • Gain $3,000 per Note or 37.63%p.a. ($3,000 / $97,000) * (365 / 30)
  • Compared to Direct Investment = A loss of $3,000
Example 2
Stock closes above Strike. Investor receives $100,000 per Note.

2. XYZ share closed at $105 (i.e. At or Above the Knock Out level of $105)
  • Each Note holder will redeem the Note in Cash equal to 100% of the Denomination $100,000.
  • A gain of $3,000 per Note or 37.63%p.a. ($3,000 / $97,000) * (365 / 30)
  • Compared to Direct Investment = A gain of $5,000
Example 3
Stock closes above Strike. Investors receives $100,000 per Note.

3. XYZ share closed at $80 (i.e. Below the Strike Price of $95)
  • Each Note holder will redeem the Note by taking physical delivery of XYZ share at $95 per share.
  • A total number of 1,052.6 XYZ shares. ($100,000 / $95). Round up to 1053 Shares.
  • Market value of 1053 XYZ share = $84,240 ($80 x 1,053)
  • A loss of $12,760 per Note ($97,000 - $84,240)
  • Compared to Direct Investment = A loss of $20,000
Example 4
Stock closes below Strike price. Investor receives $1,053 XYZ shares per Note.

*These calculations have not yet taken into account any commission and transaction costs.

Risk

Investors should be aware that the price of the high yield note depends on various factors such as volatility of the underlying, tenor, strike level, underlying spot price, interest rate etc. An increase in the underlying spot price may not necessarily mean an increase in the Note price.

These Notes are issued by major financial institutions and have credit risk. Shall the issuer of the Notes default; investors may not be able to recover the full value of the capital invested.

The Notes are not listed on any exchanges and the liquidity of the Notes in the secondary market may be limited. Investors should be prepared to hold the Notes until maturity. The Notes may be mandatorily redeemed early due to the issuer’s hedging issues, credit and default events, taxation changes etc. Investors should refer to the issuing prospectus for further information.

Investors may receive physical delivery of reference assets at settlement date; the product is not collateralized and not covered by Investors Compensation Fund.

Contact

Shall you be interested in investing or learning more about High Yield Notes or Knock Out High Yield Notes, please contact us via:
Tel: (852) 2500 9188
Email: cs@chiefgroup.com.hk


Disclaimer

The above information is provided for information purposes only and do not constitute a transaction, a solicitation, an invitation or an offer. Investment involves risks. Investors should note that the investment value may fall as well as rise and past performance may not be indicative of future performance. Independent advice should be sought prior to making any investment decision. Chief Securities expressly disclaims any responibility or legal liability for any claim for any loss (whether direct or indirect) from the use of the above information.

Investors should read and refer to the issuer’s prospectus for further information. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.

An investment in structured products such as ELN Products involves substantial risk including market risk and liquidity risk etc. Investors may sustain a total loss of investment under certain circumstances. Investors should make an appraisal of the risks involved in investing in these products. Potential investors must read the Information Memorandum and the applicable Product Booklet before making decision.


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