ELN Fixed Coupon
ELN Fixed Coupon 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 Fixed Coupon
This type represents what in Asian markets is commonly known as "Callable Fixed Coupon Equity Linked Note".
In Western markets, similar payoff structures exist but under names like "Callable Yield Note", "Structured Note with Fixed Interest", or "Equity-linked Note with Fixed Coupon Payments".
In Europe, equivalents appear as Bonus Certificates or generic structured notes with barrier/bonus features, depending on issuer and region.
A typical term sheet is the here.
Summary
Scroll below for the payoff chart.
The note pays a regular coupon with a given frequency.
The note's terminal payoff amount is based on the performance of the worst performing underlying, referred below as the minimum performance.
There exists a knock-out barrier that is observed throughout the note's life when the coupon is paid, except during an optional initial time period.
The knock-out barrier can change between successive observation times by a given step-down amount.
There also exists a knock-in barrier that is observed with a given frequency.
If the note is knocked out, the investor receives immediately the principal plus the corresponding coupon and the note expires.
Otherwise the payoff occurs at maturity as follows:
If knocked in, the investor receives the principal plus accrued interest if the minimum performance is above the given strike and otherwise a loss proportional to the minimum performance fall is incurred.
If not knocked in, the investor receives the principal plus accrued interest.
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 pay a regular coupon with a specified frequency, until knocked out.
The coupon is based on a stipulated fixed interest rate r.
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 set equal to those coupon payment dates that occur after an optional initial time period known as No Call Period.
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.
Optionally, BKO can be time-dependent so that it changes between successive observation times by a given step-down amount.
If a knock-out event occurs, the investor receives the principal plus the corresponding coupon.
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_#4
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 plus last coupon segment (black line)
Payoff = N + CP if K ≤ P
where CP is the last coupon amount.
Redemption if no knock-in event has occurred
In this case the payoff formula is simply:
Payoff = N + CP