Evolution of Absolute Return Structured Products
(Feb 2013)
From 2006 to 2009, a type of structured product known as an absolute return barrier note (ARBN) was issued by a variety of major investment banks. ARBNs are interesting because they are linked to the absolute value of the return on an underlying, not just its return, and therefore are considered non-directional bets. We've done a lot of work on ARBNs here at SLCG, including a research paper that values a sample of ARBNs and finds they are worth on average 4.5% less than their purchase price...
Structured CDs: The Big Picture
(Feb 2013)
This week we have reviewed some of the issues surrounding structured certificates of deposit, giving an introduction, example offering documents (both simple and complex), the basics of FDIC insurance of these products, and a description of some of the tax implications investors should be aware of. We hope we have conveyed our reasons for thinking that structured CDs are complex and risky investments that, like structured products, are rarely suitable for retail investors.
But there is a...
FDIC Insurance and Structured CDs
(Feb 2013)
As a continuation of our structured CDs week here on the SLCG blog, today we're going to discuss one of the biggest selling points for these products: FDIC insurance. FDIC insurance mitigates most of the credit risk found in structured products, but it may not be as significant a factor as the marking materials for structured CDs may suggest.
Structured products, the debt analog of structured CDs, are often maligned because of their exposure to credit risk. If the issuer of a structured...
What Does a Simple Structured CD Look Like?
(Feb 2013)
Okay, we've talked a bit about what structured CDs are and why we think they are interesting. But what does a structured CD offering document actually look like? Unfortunately, it isn't possible to find such documents from Bloomberg or the SEC website since structured CDs are not registered securities. However, you can often find offering documents using Google. For example, as a relatively simple equity-linked CD, we're going to take a look at the "Global Opportunity Certificate of Deposit...
Structured Certificates of Deposit Week
(Feb 2013)
Over the past several months, we have noticed more and more bank deposits that resemble structured products. These products go by various names: market-linked certificates of deposit, equity-linked certificates of deposit, contingent interest certificates of deposits, etc. For parsimony, we refer to these types of products as "structured CDs" or simply "SCDs".
We think structured CDs are a very significant development, as they can be designed to provide highly complex exposure, are almost...
Call Options on Hedge Funds: Double Markups and Detrimental Mispricing
(Feb 2013)
A recently settled FINRA Arbitration case was brought by an investor who was sold a $2M call option on a basket of hedge funds by a large investment bank. The case was notable for two reasons. First, the investment bank charged a 25 percent markup on the fair value of the option. This large amount was charged even though the investment bank -- call it Investment Bank 1 -- simultaneously laid off all of its risk by buying an equivalent call option from another investment bank -- call it...
The Basics of Options Contracts
(Jan 2013)
In a lot of our research work, we break down complex financial products into simpler pieces and then value those simple pieces one at a time. Often, those smaller components are options contracts (especially in our structured product work), which are relatively easy for practitioners to value. However, options contracts use a peculiar terminology that can be confusing to the uninitiated, so we thought we would lay out exactly what we mean when we talk about options.
Options contracts are...
Structured Products: 2012 Year-End Market Review
(Jan 2013)
Last year, we covered Bloomberg's summary of the 2011 structured product market by noting that almost "$45.5 billion worth of SEC registered structured products were sold in the US in 2011, down only slightly from $49.4 billion in 2010." In 2012, 7,909 notes totaling just over $39 billion worth of SEC registered structured products were sold in the US -- a decrease of nearly 15%.
Interest rate products continued their decline in popularity with a decrease of almost 30% from 2011 to 2012....
