Derivatives in Active ETFs
(Dec 2012)
Over two and a half years ago, the SEC initiated a moratorium on approvals for new ETFs that made extensive use of derivatives such as options and futures contracts. Much of the concern at that time was that derivatives-based ETFs, particularly leveraged, inverse, and futures-based ETFs may not have investor protections or oversight commensurate with their level of risk. Regular readers of this blog know that we have spent a good deal of time discussing those issues in addition to our ...
Structured Products Highlight: Citigroup ELKS Linked to YAHOO!
(Dec 2012)
Today we're highlighting a structured product issued on May 25, 2011 by Citigroup. This product (CUSIP: 17317U501) is an Equity LinKed Security (ELKS) linked to Yahoo! (YHOO).
ELKS are similar to reverse exchangeables in that the notes pay periodic coupons (monthly at an annualized rate of 9.50% in this case) and protect principal on a limited basis (if YHOO's price remains above the $13.08 trigger during the term of the note). In contrast to reverse exchangeables, once a trigger event occurs...
Deliverable Interest Rate Swap Futures
(Dec 2012)
Interest rate swaps are important tools used by many financial and non-financial firms to manage their interest rate exposure. Earlier this week, the CME Group launched a new derivative product called Deliverable Interest Rate Swap Futures with the contention that the product offers "maximum efficiency for managing interest rate exposure." This move is close in spirit to the recent move by the Eris Exchange to offer interest rate swaps on an open exchange. Both of these products are designed...
Structured Products Highlight: JP Morgan Reverse Exchangeable Linked to Ford
(Dec 2012)
Today we're highlighting a structured product issued on January 19, 2012 by JP Morgan. This product (CUSIP: 48125VHZ6) is a Reverse Exchangeable linked to Ford Motor Company (F). Investors who purchased the notes were exposed to the possibility that JP Morgan would default on the obligations spelled out in the note's offering documents.
This particular note offered investors monthly coupons at an annualized rate of 11.25% for the six month term of the note. If, during the term of the notes,...
Importance of Timing in Structured Products
(Nov 2012)
We've been looking through some historical issuances of structured products recently and we happened to come across a peculiar product issued by Morgan Stanley in September 2008. The product (CUSIP: 617483664) offered investors bearish exposure to the S&P 500. In other words, if the S&P 500 level declines as of the valuation date of the notes, then the product would exhibit a positive return.
Not only was the return positive if the S&P 500 went down, but it was leveraged six times -- capped...
Structured Products Highlight: UBS Autocallable Linked to JOY
(Nov 2012)
Today we're highlighting a structured product issued on July 25, 2012 by UBS. This product (CUSIP: 90269T574) is a Trigger Phoenix Autocallable Optimization Security linked to Joy
Global Inc. (JOY). Since this product is issued by UBS, purchasers of the notes were exposed to the possibility that UBS would have been unable to meet the obligations spelled out in the note's offering documents.
This particular note offered investors quarterly coupons (annualized rate of 12.84%) if JOY's stock...
Can Non-Financial Firms Issue Structured Products?
(Nov 2012)
The simple answer is yes. Structured products are for regulatory purposes corporate debt--that's why they are vulnerable to the credit risk of their issuers. In theory, any firm that can issue corporate debt could issue a structured product, and could link that structured product to any underlying asset it choose. In practice, no non-financial firm has done so in the US (to our knowledge), as there hasn't been a compelling reason for them to do so.
But according to Vita Millers at Risk.net, ...
Structured Products Highlight: Buffered SuperTrack Linked to the S&P 500
(Nov 2012)
Today we're highlighting a structured product issued on September 30, 2011 by Barclays. This product (CUSIP: 06738KWL1) is a Buffered SuperTrack Note linked to the Standard & Poor's 500 (S&P 500) index.
This particular note offered investors exposure to the S&P 500 with buffered protection if the index declines over the term of the note. Specifically, if the index level is not more than ten percent below the initial level at maturity, investors receive their entire principal investment. An...
Do Leveraged ETFs Contribute to Share Price Volatility?
(Nov 2012)
We've talked a lot about leveraged and inverse Exchange Traded Funds (LETFs)and the problems that can arise from their rebalancing. A recent paper from a group at York University asks two simple but interesting questions: does this rebalancing affect the volatility of the underlying assets? If so, can a sophisticated trader exploit that effect to achieve excess returns?
On the first question, the authors find two main results. First, the directional trades LETF providers and counterparties...
Structured Products Highlight: Reverse Exchangeable Linked to Apple
(Nov 2012)
We here at SLCG have been working on research reports to educate investors concerning recent offerings of structured products. We've talked a lot about structured products on this blog and we wanted to start describing the features of individual products and how we analyze their value.
Today we're highlighting a structured product issued in August 2012 by JP Morgan. This product (CUSIP: 48125V4K3) is a Reverse Exchangeable Note linked to Apple stock (AAPL). Reverse exchangeables -- also known...
