Product features
Digital Payoff
Payoff of a digital structure is usually a fixed amount, which will be paid if the predefined condition(s) regarding the underlying is met.
Barrier
Touch / No Touch
· Touch: Payout is given if the barrier is reached.
· No-touch: Payout is given if the barrier is NOT reached.
European / American
· European: A barrier which is only observed at expiry.
· American: A barrier which is continuously observed throughout the life of the structure.
Single / Double
· Single: A structure with only one barrier.
· Double: A structure with two barriers.
· Multiple: A structure with multiple barriers.
Features
· Payoff amount is fixed if the condition is met.
· Potential yield is higher than deposit rate.
· Settlement is periodic.
Disadvantage
· Potential yield will be reduced if the underlying is observed outside the specified range.
· Yield may be zero.
Example 1: Bullish CNH Digital Note (Capital Guaranteed)
| Underlying | USD/CNY (offshore) |
| Initial Rate | 6.2386 |
| Issue Price | 100% |
| Tenor | 12 months |
| Denomination | CNY (offshore) |
| Floor | 0.00% |
| CNY appreciation | (Initial Rate – Fixing Rate) / Initial Rate |
| Redemption at maturity | If CNY appreciation is equal to or higher than the floor, the Redemption Amount is an amount in CNY equal to: Principal Amount * (100% + 6.00%)
If CNY appreciation is lower than the floor, the Redemption Amount is an amount in CNY equal to: Principal Amount * (100% + 0.00%) |
Scenario 1
During the tenor of the investment, USD/CNY exchange rate plunge and closes at 6.2000, the CNY appreciation during the tenor = (6.2386 – 6.2000)/6.2386 = 0.62%. Since the appreciation is higher than the Floor (0%), investor receives 100% Notional + 6% p.a. interest.
Scenario 2
During the tenor of the investment, USD/CNY exchange rate rallies and closes at 6.2800, the CNY appreciation during the tenor = (6.2386-6.2800)/6.2386 = -0.66%. Since the appreciation is lower than the Floor, investor can only get 100% Notional without any return.
Example 2: Bullish CNH Performance Note (Capital Guaranteed)
| Underlying | USD/CNY (offshore) |
| Initial Rate | 6.2386 |
| Issue Price | 100% |
| Tenor | 12 months |
| Denomination | CNY (offshore) |
| Floor | 0.00% |
| Participation Ratio (PR) | 130% |
| CNY appreciation | (Initial Rate – Fixing Rate)/Initial Rate |
| Redemption at maturity | If CNY appreciation is equal to or higher than the floor, the Redemption Amount is an amount in CNY equal to: 100% Principal Amount x PR x [1+ Max (0, CNY appreciation)]
If CNY appreciation is lower than the floor, the Redemption Amount is an amount in CNY equal to: Principal Amount * (100% + 0.00%) |
Major features of this Note:
· Payout is directly linked to the performance of USD/CNY (offshore) without any cap on return.
· Higher Participation Ratio.
Example 3: CNH principal protected note on HSCEI and USD/CNH (Dual Conditions European Digital Note)
| Underlying | HSCEI and USD/CNH (two underlyings) |
| Tenor | 1 year |
| Currency | CNH |
| Principal Repayment | 100% at maturity |
| Final Valuation Date | 5 Business Days before the Maturity Date |
| Fixing time of USD/CNH | 11:15 a.m. as of Final Valuation Date |
| Interest Rate | (1) If both HSCEI Index >= 100% of Initial level and USD/CNH <=100% of initial level at Final Valuation Date, interest rate = 9.6% p.a.
(2) Otherwise 0%. |
| Repayment at maturity | Notional + Interest Amount |
| Reoffer Price | 99.50% |
Major features of this Note:
· 100% Principal Protection.
· Interest amount depends on 2 different factors (FX and equity index).
· Investors only receive the interest if BOTH conditions are satisfied, i.e. HSCEI at final valuation >= 100% of its Initial Level AND USD/CNH at final valuation <= 100% of its Initial Level.
· In case only ONE or None of the condition is fulfilled, no interest will be received.
· Risk of receiving zero interest is higher.
Risk of Investment and Investment Suitability
1. Investment involves risk. The price of a Derivative Product may fluctuate, sometimes dramatically; it may move up or down and may even become valueless. It is likely that loss may be incurred rather than profit made as a result of buying and/or selling a particular Derivative Product. Past performance figures are not indicative of future performance. The Investor should carefully read the term sheets (for Derivative Products) and other relevant documents for details before making any investment decisions, and thereafter, should regularly check for update of information relating to the Derivative Products.
2. Derivative Products are complex and involve different types of risks. The risk of loss resulting from investments in such Derivative Products can be substantial with a total loss of capital value. The Investor should: (a) study and understand the structure of the Derivative Products before placing any orders; and (b) have prior experience with investment in the Derivative Products and fully understand the associated risks before making a decision to invest in such products and ensure that the products are suitable in light of his financial position and investment objectives.
Specific Risk of Investing in Derivative Products
1. Derivative Products often involve a high degree of gearing, so that a relatively small movement in the price of the underlying securities results in a disproportionately large movement in the price. The values of Derivative Products are not fixed, but fluctuate with the market, which may be influenced by many factors, including changes in the economic and/or political environment. The prices of Derivative Products can therefore be volatile.
2. a) Investors should not buy a Derivative Product unless it is prepared to sustain a total loss of the investment plus any commission or other transaction charges.
b) While Derivative Products are unexercised and if their underlying securities are suspended from trading on the relevant stock exchanges, they may be suspended from trading for a similar period of time as their underlying securities.
c) Depending on the structure of a particular Derivative Product, an investor may be obligated to accept delivery or make delivery (as the case may be) of the underlying securities if the conversion price is triggered or pursuant to the terms and conditions of the relevant agreement, contract or confirmation of the subject Transaction. Depending on the market conditions, an investor may be obligated to accept delivery of the underlying securities at a price which is above the market price such securities or to make delivery of the underlying securities at a price which is below the market price of such securities and losses may occur resulting from such actions which can be substantial. The loss resulting from investing in such Derivative Products can be over and above the initial amounts invested to a substantial extent.
d) If there is an extraordinary event or an adjustment event such a stock split, issue of bonus shares or other unexpected event that changes the number, value or weighting of issued shares of the underlying stock, the counter-party/calculation agent may adjust the contract terms, at its sole discretion, to reflect the new market conditions. This may include unwinding the contract. The investor should seek independent advice from professional parties in the event of such extraordinary events or adjustments.
e) Early termination prior to maturity is possible subject to the terms and conditions governing the Derivative Product and prevailing market terms and conditions.
f) The value of the Derivative Products may be reduced due to any downgrades by rating agencies such as Moody’s Investors Inc. or Standard & Poor’s Rating Services.
g) Structured products are formed by combining two or more financial instruments and may include one or more Derivative Products. Structured products may carry a high degree of risk and may not be suitable for many members of the public, as the risks associated with the financial instruments or Derivative Products may be interconnected. As such, the extent of loss due to market movements can be substantial. Prior to engaging in structured product Transactions, the Investor should understand the inherent risks involved. In particular, the various risks associated with each financial instrument or Derivative Product should be evaluated separately as well as taking the structured product as a whole. Each structured product has its own risk profile and given the unlimited number of possible combinations, it is not possible to detail in this RDS all the risks which may arise in any particular case. The Investor should note that with structured products, buyers can only assert their rights against the issuer. Hence, particular attention needs to be paid to issuer risk. The Investor should therefore be aware that a total loss of his investment is possible if the issuer should default.
h) Equity-linked instruments (“ELI”) carries a high degree of risk. ELIs are products combining notes/deposits with stock options which may allow a bull, bear or strangle (i.e. trading range) bet. The return component of ELI is based on the performance of a single equity security, a basket of equity securities, or an equity index. ELI may come in different forms: equity-linked notes, equity-linked deposits and equity-linked contracts. The maximum return on investment is usually limited to a predetermined amount of cash, an investor stands to potentially lose up to the entire investment amount if the underlying share price moves substantially against the investor’s view. The Investor should be able to understand the risks he is bearing before investing in ELIs.
i) The prices of the underlying securities of Derivative Products fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. Accordingly, it is as likely that loss will be incurred rather than profit made as a result of buying or selling Derivative Products. In particular, for some Derivative Products such as accumulators, depending on market conditions, an investor may be obligated to accept delivery of the underlying securities at a price which is above the market price of such securities and loss may occur resulting from such action which can be substantial. Similarly, for some Derivative Products such as decumulators, an investor may be obligated to make delivery of the underlying securities at a price which is below the market price of such securities and loss may occur resulting from such action which can be substantial. The loss resulting from investing in such Derivative Products can be over and above the initial amounts invested to a substantial extent.
Key Risks associated with RMB Products
- RMB currency risk– RMB is not freely convertible at present and conversion of RMB through banks in Hong Kong is subject to certain restrictions.
For RMB products which are not denominated in RMB or with underlying investments which are not RMB denominated, such products will be subject to multiple currency conversion costs involved in making investments and liquidating investments, as well as the RMB exchange rate fluctuations and bid / offer spreads when assets are sold to meet redemption requests and other capital requirements (e.g. settling operating expenses).
The PRC government regulates the conversion between RMB and other currencies. If the restrictions on RMB convertibility and the limitations on the flow of RMB funds between PRC and Hong Kong become more stringent, the depth of the RMB market in Hong Kong may become further limited.
- Exchange rate risks– the value of the RMB against the Hong Kong dollar and other foreign currencies fluctuates and is affected by changes in the PRC and international political and economic conditions and by many other factors. For our RMB products, the value of Customer’s investment in Hong Kong dollar terms may decline if the value of RMB depreciates against the Hong Kong dollar.
- Interest rate risks– the PRC government has gradually liberalized the regulation of interest rates in recent years. Further liberalization may increase interest rate volatility. For RMB products which are, or may invest in, RMB debt instruments, such instruments are susceptible to interest rate fluctuations, which may adversely affect the return and performance of the RMB products.
- Limited availability of underlying investments denominated in RMB– For RMB products that do not have access to invest directly in Mainland China, their available choice of underlying investments denominated in RMB outside Mainland China may be limited. Such limitation may adversely affect the return and performance of the RMB products.
- Projected returns which are not guaranteed– For some RMB investment products, their return may not be guaranteed or may only be partly guaranteed. Investors should read carefully the statement of illustrative return attached to such products and in particular, the assumptions on which the illustrations are based, including, for example, any future bonus or dividend declaration.
- Long term commitment to investment products– For RMB products which involve a long period of investment, if investors redeem their investment before the maturity date or during the lock-up period (if applicable), investors may incur a significant loss of principal where the proceeds may be substantially lower than their invested amount. Investors may also suffer from early surrender / withdrawal fees and charges as well as the loss of returns (where applicable) as a result of redemption before the maturity date or during lock-up period.
- Credit risk of counterparties– For RMB products invest in RMB debt instruments which are not supported by any collateral, such products are fully exposed to the credit risk of the relevant counterparties. Where a RMB product may invest in derivative instruments, counterparty risk may also arise as the default by the derivative issuers may adversely affect the performance of the RMB product and result in substantial loss.
- Liquidity risk– RMB products may suffer significant losses in liquidating the underlying investment, especially if such investments do not have an active secondary market and their prices have large bid / offer spread.
- Possibility of not receiving RMB upon redemption– For RMB products with a significant portion of non-RMB denominated underlying investments, there is a possibility of not receiving the full amount in RMB upon redemption. This may be the case if the issuer is not able to obtain sufficient amount of RMB in a timely manner due to the exchange controls and restrictions applicable to the currency.
- The above key risks statement does not disclose all the risks and information in relation to investment in RMB products. For example, selling restrictions may be applicable to certain investors in accordance with the restrictions as stipulated in the relevant prospectus of the RMB products. Investors must therefore read the relevant prospectus, circular or any other documents in respect of each RMB products and carefully consider all other risk factors set out therein before deciding whether to invest.