Below is an illustrative example.
If you were to buy $10,000 worth of the following structured product:
Tenor: 3 months
Underlying: Stock ABC
Reference Price: Stock ABC $10
Strike Price: $8
Coupon: 12% p.a.
There’s a lot of jargon here, but this means at the end of 3 months:
Scenario 1: If ABC falls below the Strike Price of $8, you have to buy $10,000 worth of that stock at 8$ regardless of where the stock is trading at.
Scenario 2: If ABC closes above the Strike Price of $8, you will get your $10,000 back plus a coupon of 12% p.a. (resulting to 3% a Tenor of 3 months) of $10,000, totaling $10,300.
In this case, the risk here is in Scenario 1 where the stock falls way below $8. Generally, you should only buy this structured product if you have the following view:
- You take the view that stock ABC will not fall by more than $2 in 3 months.
- You fundamentally like the stocks and believe that they are potentially long term assets you want to hold on to. Such that, even if scenario 1 were to happen, it would not change your long term view on this product and are okay with a short term loss.