2. Wedding Cake
Structures
• An option which pays a fixed payout based on
the movement of the underlying reference rate
within certain pre-defined barriers.
• The structure is called a wedding cake due to
its tiered payoff.
• If the underlying moves within a narrow range
from its initial strike price, a high coupon will
normally be paid out
• However, the coupon rate paid, will be lower if
the underlying movies within a wider range,
• If the underlying moves out of the range, then
no coupon will be paid out.
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4. Sample 1 –
FX as underlying
Current spot rate: GBP/ USD
1.50
2 tiers available for different
payouts.
•First tier: - 1.40/1.60
•Second tier – 1.36/ 1.64
If the 2 tiers are breached,
investors receive zero returns,
only principle
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5. Sample 2 –
Commodities as Underlying
•12% coupon is paid at maturity
if Gold price is always traded
between [-30%,+30%] from its
initial spot price.
•5% coupon is paid at maturity if
the Gold price is always traded
between [-50%,+50%]
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6. Key Features
• Investors still get high coupons, even if underlying
does not move.
• Not suitable, if underlying is moving in a volatile
range, as it may result in investors getting a lower
coupon or no coupon at all!
• Suitable, if market is flat, or moves in a narrow range
– flat market.
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7. Conclusion
Wedding cake structure is a relative easy
concept to understand, both in term of
payout structure and mechanics of it.
Contact me at:
ngkaichong@yahoo.com
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