Return
The return on a structured product is the difference between the issue price and the final redemption price.
The issue price may be above 100 due to costs associated with the issuance. The final redemption price depends on the participation rate and the increase in the underlying asset.
Participation rate
The participation rate expresses how much the change in the underlying asset will be reflected in the price of the structured product. For example, if the participation rate is 80% and the underlying market has increased by 25% during the investment period, then the structured product will have a redemption value of 120 i.e. a return of 20% (80% of 25%). The participation rate can be 100%, below 100% or even above 100% depending on how the product is structured. A participation rate below 100% may reflect the “cost” of the guarantee.
The redemption value at maturity
If the underlying asset has not increased during the investment period, the final redemption price will be 100, subject to the issuer not being in default. If the issue price was above 100, then there will be a small loss e.g. if the issue price was 101, then the loss is approx. 1%.
If the underlying asset has increased, then the following calculation is applied:
Final redemption value at maturity =
100 + 100 x (participation rate x increase in the underlying asset)
This is then compared with the issue price to find the realised return on the structured product. Notice that if the participation rate is below 100%, then the return on a structured product will not be exactly the same as a direct investment in the underlying asset.
