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Making Sense of Structured Mountain Range Options
- 1. STRUCTURED PRODUCTS GUIDE MAKING A SENSE OUT OF IT
- 2. Mountain Ranges Options “Mountain ranges are exotic options originally marketed by Société Générale in 1998. The options combine the characteristics of basket options and range options by basing the value of the option on several underlying assets, and by setting a time frame for the option.” Source: Wikipedia 2
- 3. Types of Mountain Range Option Mountain Range Options Altiplano Annapurna Atlas Everest Himalaya 3
- 4. Altiplano The Geographic Definition “The Altiplano (Spanish for high plain), in west-central South America, where the Andes are at their widest, is the most extensive area of high plateau on earth outside of Tibet. Lake Titicaca is its best known geographical feature.” Source: Wikipedia 4
- 5. Altiplano The Option Definition Altiplano - in which a vanilla option is combined with a compensatory coupon payment if the underlying security never reaches its strike price during a given period. A type of basket option, (i.e. there is more than one underlying security). Pricing of the option is determined not only by the implied volatility of each security, but also by the correlations between them. Altiplano, is also known as “Comet”. 5
- 6. Altiplano Payout Features If none of the underlying securities in the Altiplano basket outperforms the strike price during the life of the option, then the option payout is just the specified coupon. But if any one of the underlying securities passes the strike price, then the option converts to a vanilla call option on each of the underlying securities or assets. (i.e., the performance of the basket will be paid) 6
- 7. Example (1) Altiplano Equity Basket Stock Basket that consists of 10 blue Barrier = 75% chip stocks Coupon = 25% UBS AG-REG DEUTSCHE BANK AG-REGISTERED BNP PARIBAS Payout Structure AMERICAN INTERNATIONAL GROUP GENERAL ELECTRIC CO Payoff = 0 if any stock breaches WAL-MART STORES INC Barrier at any time, else Coupon CITIGROUP INC Maximum Return = 25% GOLDMAN SACHS GROUP INC BANK OF AMERICA CORP 7
- 8. Example (2) Altiplano Equity Basket Stock Basket that consists of 10 blue Barrier = 75% chip stocks UBS AG-REG Payout Structure DEUTSCHE BANK AG-REGISTERED BNP PARIBAS Year 1 Coupon = 10% if Barrier AMERICAN INTERNATIONAL GROUP not activated GENERAL ELECTRIC CO Year 2- 3 Coupon = 10% if WAL-MART STORES INC Barrier not activated CITIGROUP INC GOLDMAN SACHS GROUP INC BANK OF AMERICA CORP 8
- 9. SG to offer 'mountain range' funds in Asia • SG, the securities division of French bank Société Générale, has begun rolling out its ‘mountain range’ series of capital guaranteed funds in Hong Kong, four years after they made their first appearance in the European market. • Another mountain range product to make its debut in the Hong Kong market is Altiplano, launched in the guise of SG’s Double Chance Guaranteed Fund last month after a month-long offer period. This fund offers a 200% return on capital over 4.5 years, or participation in the performance of a basket of 15 stocks with a 100% capital guarantee. Investors can achieve the 200% return if none of the underlying stocks falls below 62% of its initial value between November 2004 and November 2006. 9 Extracted from: Risk.net, “SG to offer ‘mountain range’ funds in Asia, by Nick Sawyer, 31 May 2002
- 10. Conclusion The different payout structure offered by structured products provide a huge range of choices to investors. As such, investors need to know, the risk and returns of each structure to make proper investment decisions. Contact: ngkaichong@yahoo.com 10