Payoff of a Structured Product

CFA Level I Derivatives
#1

Suppose there is a certificate on an underlying “x”. Today is 1/1/14. It has the following terms:

Issue date : January 1,2014. Maturity date : January 1,2015. Underlying : x Settlement Currency : USD Initial Reference Level : 100 USD Final Reference Level : The official closing price of the Underlying on the Maturity Date. Strike : 100% of the Initial Reference Level Certificate Level : 80% of the Initial Reference Level Participation Factor : 75% Redemption : On the Maturity Date, the holder of one Certificate is entitled to receive: a) If the Final Reference Level is at or below the Certificate Level, physical delivery of 1.25 Underlying shares. b) If the Final Reference Level is above the Certificate Level and at or below the Strike, a cash redemption amount equal to the Strike. c) If the Final Reference Level is above the Strike, a cash redemption amount equal to the Strike plus the amount that the Final Reference Level exceeds the Strike times the Participation factor.

The current price of one share of “x” is S(0)=100 USD

The question is : (A) Plot the payoff of this structured product as a function of the stock price S(T) at maturity using values for S(T) in the range 0-200 USD. (B) And second question is write the formula for this payoff as a function of the stock price S(T) at maturity.

#2

(B) The payoff is:

  • 1.25 × S(T), 0 ≤ S(T) ≤ 80
  • 100, 80 ≤ S(T) ≤ 100
  • 25 + 0.75 × S(T), 100 ≤ S(T)

(A) The graph starts at (0,0), runs straight with a slope of 1.25 to (80,100), runs straight horizontally to (100,100), then runs straight with a slope of 0.75 to (200,175).

#3

Thanks a lot! I was just confused whether they were asking for a one line formula for the payoff or the way you wrote it. Anyway thanks!

#4

My pleasure.