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8-9. Equity Linked Notes Solved

1. The document describes a yield enhancement note (reverse convertible) with a principal investment of $1,000,000, maturity of 3.75 years, and coupon (redemption amount) of 60% of principal. 2. The note is linked to the Nifty 50 index, with an entry level of 12,000. It has a decay multiple of 2x, meaning losses are doubled, and no cap on losses. 3. The structure involves short put options at various strike prices below the entry level, with the payoff dependent on the index level at maturity. If the index stays above the entry level, the investor receives the fixed redemption amount, but faces amplified losses if the index falls

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Shubhangi Jain
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47 views

8-9. Equity Linked Notes Solved

1. The document describes a yield enhancement note (reverse convertible) with a principal investment of $1,000,000, maturity of 3.75 years, and coupon (redemption amount) of 60% of principal. 2. The note is linked to the Nifty 50 index, with an entry level of 12,000. It has a decay multiple of 2x, meaning losses are doubled, and no cap on losses. 3. The structure involves short put options at various strike prices below the entry level, with the payoff dependent on the index level at maturity. If the index stays above the entry level, the investor receives the fixed redemption amount, but faces amplified losses if the index falls

Uploaded by

Shubhangi Jain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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INPUTS STRUCTURE

Instrument Details Fixed Income Investment


Type of Instrument PP-ELN Principal value
Investment 1,000,000 Maturity of note
Participation rate 0.90x Interest rate
Cap None Fixed Income Investment
Instrument maturity 3.50
Reference index Nifty 50 Options
Target index date 3.00 Option position
Strike price
Market Data Participation rate
Entry level index 14,000 Premium on option
Option values at entry level
Strike price Call option Put option For return on index
14000 2785 478 Value of index
% increase for investor
Interest rate 6.00% Increase in value for investor
Payoff per long call
No. of long calls required

Funding
Net proceeds on sale
Fixed income investment
Funds after FI investment
Premium paid on long calls

Difference
Fee & exp covered %
Payoffs
1,000,000 For Investor For Seller
3.50 Index Return Index level PP-ELN Return Redemption Fixed Income
6.00% -75% 3,500 0% 1,000,000 1,000,000
815,510 -50% 7,000 0% 1,000,000 1,000,000
-25% 10,500 0% 1,000,000 1,000,000
0% 14,000 0% 1,000,000 1,000,000
Long call 5% 14,700 5% 1,045,000 1,000,000
14,000 10% 15,400 9% 1,090,000 1,000,000
0.90x 15% 16,100 14% 1,135,000 1,000,000
2,785 20% 16,800 18% 1,180,000 1,000,000
25% 17,500 23% 1,225,000 1,000,000
1.00% 50% 21,000 45% 1,450,000 1,000,000
14,140 75% 24,500 68% 1,675,000 1,000,000
0.90% 100% 28,000 90% 1,900,000 1,000,000
9,000
140
64.3

1,000,000 (1)
815,510 (2)
184,490 (3) = (1)-(2)
179,017 (4)

5,473 =(3)-(4)
0.55%
Long call Total Difference
- 1,000,000 -
- 1,000,000 -
- 1,000,000 -
- 1,000,000 -
45,000 1,045,000 -
90,000 1,090,000 -
135,000 1,135,000 -
180,000 1,180,000 -
225,000 1,225,000 -
450,000 1,450,000 -
675,000 1,675,000 -
900,000 1,900,000 -
INPUTS STRUCTURE
Instrument Details Fixed Income Investment
Type of Instrument PP-ELN Principal value
Investment 1,000,000 Maturity of note
Participation rate 5.0x Interest rate
Cap 50.00% Fixed Income Investment
Instrument maturity 3.50
Reference index Nifty 50 Options
Target index date 3.00 Option position 1
Strike price
Market Data Cap
Entry level index 17,500 Participation rate
Option values at entry level Index return for cap
Strike price Call option Put option Option position 2 for cap
14,000 5,740 111 Strike price
15,750 4,450 304 Premium on option 1
17,500 3,326 664 Premium on option 2
18,375 2,837 917
19,250 2,399 1,221 For return on index
20,125 2,013 1,577 Value of index
21,000 1,676 1,981 % increase for investor
Increase in value for invest
Interest rate 9.50% Payoff per long call
No. of long calls required
No. of short calls

Funding
Net proceeds on sale
Fixed income investment
Funds after FI investment
Premium paid on long calls
Premium earned on short c

Difference
Fees & exp covered %
Payoffs
1,000,000 For Investor For Seller
3.50 Index Return Index level PP-ELN Return Redemption Fixed Income
9.50% -50% 8,750 0% 1,000,000 1,000,000
727,865 -20% 14,000 0% 1,000,000 1,000,000
-10% 15,750 0% 1,000,000 1,000,000
0% 17,500 0% 1,000,000 1,000,000
Long call 5% 18,375 25% 1,250,000 1,000,000
17,500 10% 19,250 50% 1,500,000 1,000,000
50.00% 15% 20,125 50% 1,500,000 1,000,000
5.0x 20% 21,000 50% 1,500,000 1,000,000
10.00% 25% 21,875 50% 1,500,000 1,000,000
Short call 50% 26,250 50% 1,500,000 1,000,000
19,250 75% 30,625 50% 1,500,000 1,000,000
3,326 Pay 100% 35,000 50% 1,500,000 1,000,000
2,399 Get

1.00%
17,675
5.00%
50,000
175
286
286

1,000,000 (1)
727,865 (2)
272,135 (3) = (1)-(2)
950,148 (4)
685,435 (5)

7,423 =(3)-(4)+(5)
0.74%
Long call Short call Total Difference
- - 1,000,000 -
- - 1,000,000 -
- - 1,000,000 -
- - 1,000,000 -
250,000 - 1,250,000 -
500,000 - 1,500,000 -
750,000 (250,000) 1,500,000 -
1,000,000 (500,000) 1,500,000 -
1,250,000 (750,000) 1,500,000 -
2,500,000 (2,000,000) 1,500,000 -
3,750,000 (3,250,000) 1,500,000 -
5,000,000 (4,500,000) 1,500,000 -
INPUTS STRUCTURE
Instrument Details Fixed Income Investment
Type of Instrument Yield Enhancement Note (Reverse Convertible) Fixed Redemption Value
Investment 1,000,000 Maturity of note
Decay multiple 2.00x Interest rate
Cap None Fixed Income Investment
Instrument maturity 3.75
Coupon (maturity) 60% Options
Reference index Nifty 50 Option position
Target index date 3.00 Strike price
Decay multiple
Market Data Premium on option
Entry level index 12,000
Option values at entry level For decrease in index
Strike price Call option Put option Value of index
10,800 3,391 412 % increase for investor
11,100 3,208 480 Change in value for investor
11,400 3,032 554 Payoff per short put
11,700 2,863 635 No. of short puts required
12,000 2,700 723
12,300 2,544 818 Funding
12,600 2,395 919 Net proceeds on sale
12,900 2,253 1,028 Fixed income investment
13,200 2,117 1,142 Funds after FI investment
13,500 1,988 1,264 Premium earned on short puts

Interest rate 10.50%


Difference
Fees & exp covered %
Payoffs
1,600,000 For Investor
3.75 Index Return Index level Decay Multiple Coupon
10.50% -100.0% - 2.00x 60%
1,100,301 -90.0% 1,200 2.00x 60%
-80.0% 2,400 2.00x 60%
-70.0% 3,600 2.00x 60%
Short Put -60.0% 4,800 2.00x 60%
12,000 -50.0% 6,000 2.00x 60%
2.00x -40.0% 7,200 2.00x 60%
723 -30.0% 8,400 2.00x 60%
-20.0% 9,600 2.00x 60%
-1.00% 0.0% 12,000 0.00x 60%
11,880 2.5% 12,300 0.00x 60%
-2.00% 5.0% 12,600 0.00x 60%
(20,000) 7.5% 12,900 0.00x 60%
(120) 10.0% 13,200 0.00x 60%
167 20.0% 14,400 0.00x 60%
50.0% 18,000 0.00x 60%

1,000,000 (1)
1,100,301 (2)
(100,301) (3) = (1)-(2)
120,518 (4)

20,218 =(3)+(4)+(5)
2.02%
For Seller
ELN Return Redemption Fixed Income Short Put Total Difference
-100% - 1,600,000 (2,000,000) (400,000) (400,000)
-100% - 1,600,000 (1,800,000) (200,000) (200,000)
-100% - 1,600,000 (1,600,000) - -
-80% 200,000 1,600,000 (1,400,000) 200,000 -
-60% 400,000 1,600,000 (1,200,000) 400,000 -
-40% 600,000 1,600,000 (1,000,000) 600,000 -
-20% 800,000 1,600,000 (800,000) 800,000 -
0% 1,000,000 1,600,000 (600,000) 1,000,000 -
20% 1,200,000 1,600,000 (400,000) 1,200,000 -
60% 1,600,000 1,600,000 - 1,600,000 -
60% 1,600,000 1,600,000 - 1,600,000 -
60% 1,600,000 1,600,000 - 1,600,000 -
60% 1,600,000 1,600,000 - 1,600,000 -
60% 1,600,000 1,600,000 - 1,600,000 -
60% 1,600,000 1,600,000 - 1,600,000 -
60% 1,600,000 1,600,000 - 1,600,000 -

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