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Would this Autocallable Fixed Coupon Note be a good investment?

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  1. #1

    Join Date
    Oct 2018
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    Would this Autocallable Fixed Coupon Note be a good investment?

    I asked my banker for potentially more profitable investments than Austrian bonds (), and this seems ok to me, but I want to check if I am missing something. It's an Autocallable Fixed Coupon Note, for Shell (RDSA:AS, they don't offer it for RDSB:AS), and if I understand correctly (see below for their snapshot): I have to invest 100,000 Euros, and I am given 6% a year. If the price drops below 26.441 within the next 12 months I am given the stocks (so if the stocks drop to 25, I lose 1.441 per stock). If the price is above 29.005 I get 6%.

    From their brochure: 1) If the Reference Share closes at or above the predefined Strike Price at maturity, the investor will receive the Nominal Amount. 2) If the Reference Share closes below the predefined Strike Price at maturity, the investor will take delivery of the Reference Share at the predetermined Strike Price, or if the investor has opted for cash settlement, the investor will receive a cash amount equal to market value of the Reference Share on Valuation Date. This may result in a significant loss.
    My reasoning is that now the dividend of RDSA:AS is 1.88 Euros, which means that at 26.441 I would have a dividend of 7.11% (-15%=6.04%). The price may as well go below 26.441 within the next 12 months, in which case I will get the shares, but I will still get a dividend of 1.88 Euros. My reasoning is: would I buy RDSA shares at 26.441 today? Yes, definitely. Even if tomorrow of course the price might be lower. Am I missing something? Thoughts are very welcome, since I don't know much about these things, and I am not very bright.
    Last edited by john_1122; 02-07-2019 at 03:02 PM.
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  2. #2

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    if you are ready to buy 100k of RDSA, then this product is reasonable for you.
    however you do not receive the dividend of the shares.. you will only be getting the 6% coupon of the FCN, i.e. 6000 EUR for the 100k EUR you have invested, which comes to EUR 1.61 per share if you take delivery of the share..

    the downside, if RDSA shoots up within the next one month and ends the month above 29.005, then you would only receive 0.5% (i.e. 6% p.a. for 1 month) and that only comes up to 0.134 EUR, plus your capital back. If you have had the shares you would have enjoyed the capital gain as well as the 1.7EUR dividend over the next 1 year.

    up to your view.. good if you think RDSA will not go above today's price and will hold above the strike at the end of the year.


  3. #3

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    Sorry, geoexpat doesn't work well, so I couldn't upload the image.
    Thank you for your comment. They have a "Observations and Settlements:Quarterly (4 Periods)", so it means that at the end of the quarter if the price is above 29.05 they will give me back the cash and the accrued dividend (i.e. 6% p.a. for 3 months)?


  4. #4

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    yes then, in that case you will receive minimum of 3mth of 6% p.a. coupon even if the stocks move up alot on day 1..

    anyway these products is about forgoing the upside, and betting that the downside is not severe..
    since its from JB, the guy that runs the portfolio of this note... i probably know him quite well...

    my take is, if you have a portfolio of, say, 5mio, and you are putting 1.5mio to work on these.. splitting the 1.5mio up into 15 tranches and distributing out your risk, then its not really a bad product.. but you also need to be aware that your RM is probably making 1.5%~2% outright from you while the minimum you are making could be just 1.5% for the 3mth.

    uncle 4, if you know that local name for the tycoon, made alot of fortune doing these products.. he hired an ex equity derivative chap from deutsch bank to run his portfolio.. their way of doing - divest into many trades, go for the high yield volatile stocks that can give them 25~30% p.a. of coupons... get the note KO quickly and then redo the next one...