Glossary A to C
A
Asian Option (or Asian Tail)
- Asian options use averaging in determining either the strike price or the final settlement price. The period for averaging is always specified in the product terms and conditions.At-the-money
- A term used to describe any option that has its strike price close to the level of the underlyingprice.Averaging –
this can be used when working out either the starting level or closing value of an index calculated during some pre-specified period. It is designed to smooth out rises and falls that may affect the benefits you receive.B
Backtesting
- The marketing material used to promote most investment funds including structured investments often includes illustrations of how the product would have performed if it had been available at some time in the past. This analysis is called backtesting.Balanced or back to back product
- This term is sometimes used to describe a product in which the investment is split between two separate elements. Typically one element is a deposit of a one year term or more which pays a high fixed (or floating) rate and the other element is linked to some underlying assets as diverse as equity indices and the price of oil. The higher the rate of income, the lower the participation in the underlying assets as the underlying asset subsidises the higher income.Basket option or basket of indices - A basket is where the underlying is more than one index. So for example an option that pays out based on the performance of the FTSE100, DJ Eurostoxx50 and S&P500 would be called a basket option.
Basket of shares –
this is where a limited number of shares are used to create a basket, which is normally smaller than an index, say 30 companies from the FTSE 100. The basket is then used to measure performance in exactly the same way as an index is. Really what is created is a mini index.Bonds –
can be used rather than a special purpose or closed-ended investment company. The bond or medium term notes (MTNs) will be issued by one or more major EU financial institutions, and listed on a recognised European stock exchange. If the issuer or another financial institution collapses, it could affect the benefits you would receive.Bonus shares –
these are normally issued if you invest in a product ahead of the closing investment date for the plan. The interest that builds up on your investment from when the cheque clears to the investment date (the start date of the product) is worked out and paid in the form of extra shares. These are automatically re-invested, so it increases the initial investment value of the plan.C
Call option –
this is a type of derivative that would be bought on the LIFFE by a trader who believes the market is going to rise in the future.Callable -
A callable product is one that may redeem before its stated maturity date. For example, a product may offer a minimum return of 100% of the amount invested and a potential bonus equal to 100% of the rise in the FTSE100 index at the end of five years.
However an additional condition might be set such that if the FTSE100 index has risen by 30% after three years, the product would pay out early so that investors would receive their original investment back in full plus a return of 30% at that time.
Callable products may be called early because a pre-specified event occurs, such as the index rising to a given level by a fixed date, or else the product may be callable at the discretion of the product issuer.
Sometimes this is known as a "kickout".
Cap
-
structured investments provide for a minimum return irrespective of the performance of the underlying market to which the product is linked. In exchange for this protection however some products also specify a maximum return than can be paid should the market in fact rise. Such a maximum return is often called a cap and such products may be called
"capped".
For example a product might provide a minimum return of 100% of the sum invested at the end of five years plus 100% of any rise in the FTSE100 index with a cap at 60%. This means that if the index rise by 40% for example, the return from the product would be 40%. However if it rises by 75% the return from the product would be capped at 60%.
Capital protected products –
these guarantee that you will receive back at least the money you originally invested in the plan, no matter how well or poorly the product performs.So if you originally invested £1,000, you will receive at least £1,000 back over the life of the plan – either as a lump sum at the end or as a lump sum minus the amount paid as income during the plan’s life. In extreme cases the income paid throughout the life of the plan could equal the amount you originally invested. In this case, you may not receive a lump sum when the product becomes due for payment.
Cash locked - for CPPI products (see below), where the value of the risky asset has fallen below a minimum level, all the assets are placed in the non-risky (cash) bucket. With older CPPI products, and before the advent of new trading platforms, this meant that no further participation in the risky asset was possible and the product would only pay out the guaranteed capital. Recent advances in CPPI strategies in some banks has solved this problem but by no means is it widely available.
Cliquet -
A cliquet is the name given to a type of structured investment where the return is calculated from the performance of the underlying in a number of sub-periods during the term of the product.For example, a five-year maturity Cliquet product linked to the FTSE100 index might offer investors a minimum return of 100% of the sum invested at the end of five year plus a bonus calculated as the sum of the individual performances of the index in each year of the five year term.
In many cases the performance of the underlying would be limited, or capped, in each sub-period. This is sometimes called a Local Cap. There may also be a limit on the size of any falls in the sub-periods that are used in the calculation of the final return. Such a limit is sometimes called a Local Floor.
Sometimes a Cliquet product will have a minimum return greater than 100% of the sum invested. In this case if the calculated sum of sub-period returns is less than this specified minimum return, then the minimum return is paid anyway.
Close-of-business price or closing index level –
this is the final price of an index or share at the end of the day’s trading. This value is generally higher than the intra-day level which is the lowest point during the course of the day. These prices are the values quoted in the newspapers the following day and are often used for reference purposes.Closed-ended investment company –
this is a special-purpose investment company, or a ring-fenced (safeguarded) unit within a company, that is set up each time a new product is offered. The shares are quoted and listed on a recognised stock exchange. Each product has its own closed-ended investment company or cell that lasts for the life of the product only. It closes when the product becomes due for payment.For tax reasons, closed-ended investment companies are usually listed on foreign stock exchanges with Dublin being the most popular. This route allows you to take advantage of favourable rates of income tax as well as capital gains allowances when the company is wound up. As with bonds, the risk to these investments is if one of the large financial institutions backing them should fail.
Commission –
this is paid to intermediaries, for example, independent financial advisers. It is normally between 1% and 4% of the amount invested, depending on the product, provider and returns offered. Products can be issued on reduced commission terms, but everyone involved has to agree to this.Constant Proportion Portfolio Insurance (CPPI)
- Constant Proportion Portfolio Insurance (CPPI) is the name given to a trading strategy that is designed to ensure that a fixed minimum return is achieved either at all times or more typically, at a set date in the future.Essentially the strategy involves continuously re-balancing the portfolio of investments during the term of the product between so-called risky assets (the key underlying) and non-risky assets (usually cash).
As the value of the risky assets rise so more of the portfolio is placed in these assets but conversely as they fall in value, more of the portfolio is placed in the non-risky assets. By following the rules set out by the strategy the minimum return can be achieved as long as the value of the risky assets does not fall too sharply. In this case however the product provider offering such a product would rely on a guarantee or option provided by a third-party bank to ensure that the minimum return was achieved.
The key features of CPPI based capital protected products as opposed to option-based products are: The participation in any rise in the underlying is not fixed upfront It is possible to have a higher initial participation than with an equivalent option-based product