ELN Enhanced Yield
ELN Enhanced Yield is a direct subtype of ELN T1
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TYPE INCLUSION RELATIONSHIPS
AVAILABLE FUNCTIONS
AVAILABLE CREATE FUNCTION KEYS
TYPICAL OBJECTS OF TYPE ELN Enhanced Yield
This type represents what is often known as "Equity Linked Note Yield Enhancement" or "Equity Linked Note Reverse Convertible".
A typical term sheet is the here.
Summary
Scroll below for the payoff charts.
A special aspect of this note is that the investor obtains it by paying a discounted issue price that is significantly less than the note's principal.
The note's market price is quoted in terms of its yield, which is calculated based on the note's tenor and the differential between the issue price and the principal.
The note's payoff amount is based on the performance of the worst performing underlying, referred below as the minimum performance.
There exist both a knock-out and a knock-in barrier that are observed throughout the note's life with given frequencies.
If the note is knocked out, the investor receives immediately the principal and the note expires.
Otherwise the payoff occurs at maturity as follows:
On the upside, the investor receives the principal.
On the downside, the investor loses proportionally to the minimum performance if it falls below a certain level.
A potential knock-in event during the life of the note only affects the level of the minimum performance below which the downside comes into effect.
If knocked in, that level is set to the knock-in strike.
If not knocked in, that level is set to the somewhat lower knock-in barrier.
Details
Underlying
The note references n stocks or stock indices S₁ , S₂ , ... , Sₙ with n ≥ 1, all of the same currency.
At any given observation time t in the future, these stocks (or stock indices) will have corresponding market prices S₁(t) , S₂(t) , ... , Sₙ(t).
The note also defines fixed so-called reference prices S⁰₁ , S⁰₂ , ... , S⁰ₙ
The payoff and the various triggers depend only on the performances P₁(t) , P₂(t) , ... , Pₙ(t) - also referred to as growth factors - defined as follows:
P₁(t) , P₂(t) , ... , Pₙ(t) = S₁(t)/S⁰₁ , S₂(t)/S⁰₂ , ... , Sₙ(t)/S⁰ₙ
Explicitly:
P₁(t) = S₁(t)/S⁰₁
P₂(t) = S₂(t)/S⁰₂
...
Pₙ(t) = Sₙ(t)/S⁰ₙ
From a quantitative perspective, the performances P₁(t) , P₂(t) , ... , Pₙ(t) may be regarded as the note's underlyings.
Coupon
This note does not pay a regular coupon.
Knock-Out
A knock-out event may occur at any time t that is part of a predefined set of u knock-out observation dates Tᴷᴼ₁ , Tᴷᴼ₂ , ... , Tᴷᴼᵤ.
The dates Tᴷᴼ₁ , Tᴷᴼ₂ , ... , Tᴷᴼᵤ are typically set through the stipulation of a knock-out observation frequency, such as monthly.
The knock-out event depends on the minimum performance PMIN(t), defined as below in the knock-in section.
A knock-out event occurs if:
PMIN(t) ≥ BKO
where BKO is a fixed number - such as 100% - referred to as the knock-out barrier.
If a knock-out event occurs, the investor receives the principal.
Knock-In
A knock-in event may occur at any time t that is part of a predefined set of v knock-in observation dates Tᴷᴵ₁ , Tᴷᴵ₂ , ... , Tᴷᴵᵥ.
The dates Tᴷᴵ₁ , Tᴷᴵ₂ , ... , Tᴷᴵᵥ are typically set through the stipulation of a knock-in observation frequency, such as monthly.
The knock-in event depends on the minimum performance PMIN(t), defined as:
PMIN(t) = min(P₁(t) , P₂(t) , ... , Pₙ(t))
A knock-in event occurs if:
PMIN(t) ≤ BKI
where BKI is a fixed number - such as 80% - referred to as the knock-in barrier.
The occurrence, or non-occurrence, of a knock-in event affects the redemption payment at the note's maturity, as seen below.
Redemption
The redemption amount at maturity T depends on whether a knock-in event has been observed at or before T.
There exist therefore two scenarios:
Redemption if a knock-in event has occurred
Let P denote the performance at T of the worst performing asset.
Equivalently, define P as:
P = PMIN(T)
In this case the payoff diagram at T looks as below, where the horizontal axis spans the P and the vertical axis spans the payoff per unit notional.
There exist 2 regimes depicted with different colors.
The formulas for the various linear segments are as follows.
Equity Linked Loss segment (red line)
Payoff = (N/K)P if P < K
where N is the note's notional.
Note that in most term sheets this payoff is formulated differently - but equivalently - in terms of an allocation of shares to the investor, as described at info_#3
Example 1
N = 100 USD, K = 90%, P = 90%, then payoff = ((100 USD) / 90%) * 90% = 100 USD
Example 2
N = 100 USD, K = 90%, P = 85%, then payoff = ((100 USD) / 90%) * 85% = 94.44 USD
Principal Only, Zero Return segment (black line)
Payoff = N if K ≤ P
Redemption if no knock-in event has occurred
In this case the payoff diagram at T looks as below.
The only difference between this diagram and the previous one is that in the case here the Equity Linked Loss segment (red line) has shorter length.
It extends to the right only until the x-coordinate equals the knock-in barrier BKI
It is therefore obvious that the absence of a knock-in event is advantageous for the investor .
The applicable formula for that segment is:
Payoff = (N/K)P if P < BKI
Example
N = 100 USD, BKI = 80%, K = 90%, P = 70%, then payoff = ((100 USD) / 90%) * 70% = 77.77 USD
Payoff = N if BKI ≤ P < K
Example
N = 100 USD, BKI = 80%, K = 90%, P = 85%, then payoff = 100 USD, because P > BKI