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The Structured Product


Brokers are selling synthetic derivatives as structured notes to PMS clients. This is a common phenomenon – basically they sell a product in which they link returns to the Nifty or some such index, but cut-off the returns at an upper “barrier”. The article describes an example:

This means if the Nifty is at 5,000 at the time of the launch of the product and moves to 6,250 any time during the 12 months, the product expires and the investor gets his principal and a pre-decided coupon of 10.75 per cent after 15 months. In case the Nifty remains between 5,000 and 6,250 at the end of 12 months, the investor gets principal plus index return and 10 per cent extra on the index return. If the Nifty falls below 5,000, the investor gets back only his capital after 15 months.

To do this product, you just have to buy and sell long term Nifty options against a 15 month fixed deposit (Options have no mark-to-market payin/out, so the entire FD can be used as collateral, no cash required). In this particular case I can construct such a strategy buying a 1 year 5000 call at 548, selling 1.2x the 1 year 6000 call at 150 – these are friday’s rates – and using the rest of the money in a 15 month FD at 7% a year. The quantity of the options is 1.1 times the exposure and you unwind as the Nifty crosses 6,000. I know I should put it in a table or something, but I’m too lazy.

In doing so I will profit under any circumstances; it is a matter of max 4 trades and an FD, for which they charge you 3% upfront “load” saying it’s a “structured product”. Fabulous – The 3% for four trades and an hour with an excel sheet is a great deal, for nearly no risk!

The “barrier” makes me EVEN higher profits if the index crosses 6000 later on in the period compared to earlier. If the index crosses 6000 11 months after the process starts, I can make, including the 3% commissions, about 5% – again, with no risk.

There is risk, but it’s passed on to you – the risk that the FD defaults.

For this kind of “structured product” these brokers and banks charge a hefty 3% as commissions, and take profits % of your money beyond what they promise you. It’s amazing, this business.


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