|
The underlying structure of a GROI is a combination of fixed income instrument and an embedded derivative option. The fixed income portion guarantees to repay the full investment amount at maturity. The option portion provides equity participation of the chosen market.
There are basically 3 structures for clients to participate on the upside of any chosen instrument: unlimited profit potential, limited profit potential, and fixed profit potential. Based on the given structure, we will calculate the principal guarantee portion, participation rate, and subsequently the allocation of bond and option portion of the note.
Due to the flexibility of the structure, the issuer may customize to suit client’s any particular needs. In addition, such products allow investors to achieve the gains of any underlying instrument, such as any particular stock, equity market, interest, currency, etc, with certain amount of guaranteed investment repayment. The thesis will not only focus on the technicality of the notes, I will also focus on the marketing perspectives of such products, along with introduction of some of the most popular types of principal protected high yield notes. I will also focus on how to evaluate the investment benefits and pitfalls of such products from investor’s point of view.
|