What is Accumulator (Decumulator)?
It is a series of forward contract for clients to buy (sell*) the reference share at a pre-determined price in each Exchange Business Day during the life of contract.
Pre-determined purchase (selling*) price (i.e. strike price) is usually at discount (premium*) to the initial fixing price for accumulator (decumulator*).
Knock Out feature (at day close) which may lead to termination of contract prior to maturity date.
Leverage / Gearing feature is that if closing price of reference share is below (above*) the strike price, client has to buy (sell under decumulator*) more number of shares than in normal days which equals to the number of times of leverage.
Guaranteed number of shares feature is that if the Knock Out event triggers within the guaranteed period, guaranteed number of shares (number of shares bought / sold* in normal days x no of days in the guaranteed period) will be delivered to client at strike price (settlement at Knock Out Date + 1 settlement cycle)
Stamp Duty and Levy paid by client if there is share settlement.
Features
- Purchase (sold*) the reference share at a discount (premium*) price compared to the Initial Spot Fixing
- Periodic settlement
Risks
- Liquidity Risk – no active secondary market, high exit costs and losses
- Investment Risk – investors have to take up (sell*) the agreed amount of the underlying asset at the strike price even when the market price falls below the strike price resulting in potential significant loss
- Credit Risk – client takes the credit risk of the issuer
- Leverage Risk (if applies) – the potential loss could be magnified
- Knock Out Risk – investors potential profit is capped by such feature which means the risk of terminating the contract at a date earlier than maturity date
- Mark-to-Market Risk – for margin based investors, they need to be prepared for paying interest cost for margin / credit facility and meeting margin calls, the margin calls may be given at short notice. When investors fail to meet margin calls, the contracts may be closed out without the investors’ consent and the investors have to bear the consequential losses and costs. This is also a risk of the accumulator / decumulator of which the underlying shares moving in an unfavorable direction resulting in loss.
- Settlement Risk – the risk that the counterparty failed to deliver as per agreement.
- Before the settlement of shares, investor cannot enjoy the shareholder right and benefit by holding an accumulator.
* for the case of decumulator
Sample Terms of Accumulator
- Issuer / Counterparty
- Reference stocks
- Reference Share Price / Spot Price
- (Purchase) Strike Price: usually expressed as percentage of share price
- Knock Out Price: usually expressed as percentage of share price (Observation starts from Trade Date, i.e. T+0, Accrual starts from T+1 Business Day)
- Guaranteed Period which means the number of shares that the investor must receive (for accumulator) / deliver (for decumulator) even knock out event happened during the guaranteed period
- Settlement Frequency
- Number of shares per day
- Notional Amount = No. of shares per day x No. of Exchange Business Days x Reference Share price
Example 1 Non Leverage Accumulator
Investor asked for a 1 year, standard accumulator on ABC Co Ltd, no leverage, 1 month guaranteed, 103% KO price, monthly settlement, no. of shares per day = 3,000 shares, number of Exchange Business Days = 250.
| Strike Price | 88.7% of Spot |
| Reference Share price | $5.25 |
| Strike Price | $5.25 x 88.7% = $4.6568
(up to 4 decimal places only) |
| Maximum Number of Shares Purchased within the contract life | 3,000 x 250 = 750,000 shares |
| Notional Amount | 750,000 x $5.25 = $3,937,500 |
| Maximum Settlement Amount in the Worst Case (i.e. no Knock Out event triggered) | 750,000 x $4.6568 = $3,429,600 |
Example 2 Leverage Accumulator
Client asked for a 1 year, leverage (2x) accumulator on XYZ Co Ltd, 1 month guaranteed, 103% KO Price and monthly settlement, no. of shares per day = 3,000 shares, number of Exchange Business Days = 250.
| Strike Price | 84.2% of Spot |
| Reference Share price | $5.25 |
| Strike Price | $5.25 x 84.2% = $4.4205
(up to 4 decimal places only) |
| Maximum Number of Shares Purchased within the contract life | 3000 x 250 x 2 = 1,500,000 shares
(Worst Case) |
| Notional Amount | 750,000 x $5.25 = $3,937,500 |
| Maximum Settlement Amount in the Worst Case (i.e. no Knock Out event triggered) | 1,500,000 x $4.4205 = $6,630,750 |
Example 3 Leverage Decumulator
Client asked for a 1 year, leverage (2x) decumulator on WWW Co Ltd, 1 month guaranteed, 97% KO Price and bi-weekly settlement, no. of shares per day = 3,000 shares, number of Exchange Business Days = 248.
| Strike Price | 116.88% of Spot |
| Reference Share price | $22.00 |
| Strike Price | $22.00 x 116.88% = $25.7136
(up to 4 decimal places only) |
| Maximum Number of Shares Sold within the contract life | 3000 x 248 x 2 = 1,488,000 shares
(Worst Case) |
| Notional Amount | 744,000 x $22.00 = $16,368,000 |
| Maximum Settlement Amount in the Worst Case (i.e. no Knock Out event triggered) | 1,488,000 x $25.7136 = $38,261,836.80 |
| Assume 1 month has 20 trading days, guaranteed number of shares to sell | 60,000 shares |
Worst Case Scenario
For accumulator, the worst case is when the reference share price falls to zero throughout the entire life of tenor. In this case, investor purchases the maximum number of shares until the end of accumulator tenor. If the investor realizes his profit / loss by selling the number of shares in the market where the stock price falls to zero, the maximum loss = (strike price – 0) x maximum number of shares per day x number of days.
For decumulator, the worst case is when the reference share rises above the strike price throughout the entire life of tenor. The downside risk is theoretically unlimited.
Product Risk
- Product Risk is very high (regardless of the tenor)
- Product Complexity is complex
- Private Placement (Over-The-Counter)
- Professional Investor ONLY
Further Illustration – Example 1
Investor entered an accumulator contract to buy Hello Co Limited in coming 1 year. The indicative strike price and knock out price is 90% and 103% respectively for 1 year contract without guaranteed number of shares and leverage.
Terms of Accumulator (Normal, No Guaranteed) are:
| Tenor | 1 year (assuming 250 days) |
| Trade Date | 4 August 2010 |
| First Accumulation Date | 5 August 2010 |
| Last Accumulation Date | 5 Aug 2011 |
| Expiry Date | 9 Aug 2011 |
| Strike Level | 90% of Initial Spot (i.e. 90% x $4.00 = $3.60) |
| Knock Out Level | 103% of Initial Spot (i.e. 103% x $4.00 = $4.12) |
| Reference Share Price | $4.00 |
| Number of Shares | 5,000 shares/day |
| Notional Amount | 5000 x 250 x $4.00 = $5,000,000 |
| Max Settlement Amount | 5000 x 250 x $3.60 = $4,500,000 (Worst Case) |
Scenario 1
If Hello Co Ltd closed above the Knock Out level (i.e. $4.12) on Trade Date
Number of Shares accumulated = 0
Scenario 2
If Hello Co Ltd closed above the Knock Out level in T+10 days (the date which the accumulator knocked out does not count for accumulation)
Number of Shares accumulated = 9 x 5,000 = 45,000 shares
On KO+2 days debit investor account = 45,000 x $3.6 = $162,000
credit investor account 45,000 shares of Hello Co Ltd
Scenario 3
If Hello Co Ltd closed above the Knock Out level in T+25 days (8 Sep 2010)
On 7 Sep 2010, investor received the full 1st period of shares = 22 x 5000 = 110,000 shares, assuming the first settlement period has 22 trading days
On 10 Sep 2010, investor received the 2nd period of shares = 2 x 5000 = 10,000 shares
Further Illustration – Example 2
Investor entered an accumulator contract to buy Hello Co Ltd in coming 1 year. The indicative strike price and knock out price is 85% and 103% respectively for 1 year contract with guaranteed number of shares (the first period/ 22 days, assuming the guarantee period starts from T+1 to T+22, monthly basis) and leverage (2x).
Terms of accumulator (Leverage, Guaranteed) are:
| Tenor | 1 year (assuming 250 days) |
| Trade Date | 4 August 2010 |
| First Accumulation Date | 5 August 2010 |
| Last Accumulation Date | 5 Aug 2011 |
| Expiry Date | 9 Aug 2011 |
| Strike Level | 85% of Initial Spot (i.e. 85% x $4.00 = $3.40) |
| Knock Out Level | 103% of Initial Spot (i.e. 103% x $4.00 = $4.12) |
| Reference Share Price | $4.00 |
| Number of Shares | 5,000 shares/day |
| Notional Amount | 5000 x 250 x $4.00 = $5,000,000 |
| Max Settlement Amount | 5000 x 250 x $3.40 x 2 = $8,500,000 (Worst Case) |
Scenario 1
If Hello Co Ltd closed above the Knock Out level (i.e. $4.12) on Trade Date
Number of Shares accumulated = 0
Scenario 2
If Hello Co Ltd closed above the Knock Out level (i.e. $4.12) in the Trade Date + 1
Number of Shares accumulated = 22 x 5,000 = 110,000 shares
On KO+2 days debit investor account = 110,000 x $3.4 = $374,000
credit investor account 110,000 shares of Hello Co Ltd
Scenario 3
If Hello Co Ltd closed above the strike from T+1 to T+5, below the strike from T+6 to T+9 and it closed above Knock Out level on T+10 date,
Number of Shares accumulated = 18 x 5,000 + 4 x 2 x 5,000 = 130,000 shares
Risk Disclosure Statement on Term Sheet
- General Risk of Derivatives
Equity Accumulator / Decumulator is a derivative product, which is complex and may involve substantial risks. It is not possible to accurately predict what Investor’s return on this product will be because such return depends on a number of factors. This product is only suitable for sophisticated investors who have sufficient knowledge and experience in financial and business matters to evaluate the relevant risks.
- Principal Protection
Equity Accumulator / Decumulator is not principal protected. Investors are exposed to the unlimited risk of the underlying stock trading unfavourably.
- Market Risk
Investing in Equity Accumulator / Decumulator involves market risk. There are many factors that affect the market value of this product. Changes in the price or value of the underlying stock can be unpredictable, sudden and large. Such changes may result in the price of the underlying moving adversely to Investor’s interests and negatively impacting on the return on this product. For equity accumulator, Investor may suffer substantial loss as he is bound by this product to buy periodically the agreed amount of the underlying asset when the market price falls below the Strike Price. For equity decumulator, Investor may suffer substantial loss as he is bound by this product to sell periodically the agreed amount of the underlying asset when the market price rises above the Strike Price.
- Credit Risk
Investor is relying upon the creditworthiness of Issuer and will be exposed to the credit risk of it.
- Secondary Market and Liquidity Risk
There might not be a liquid secondary market in the accumulator / decumulator contracts. This product does not trade on any exchange, and may be illiquid. As a result, it may be impossible for Investor to sell it to Issuer / Counterparty, any of its affiliates, another purchaser or dealer and there is no central source to obtain current prices from other dealers.
Investor should aware of the tenor of this product, the longer the tenor, the higher the exit costs for the early termination of contract.
- Corporate Actions/Extraordinary Events
Other risks may impact on the value of this product, for example corporate actions or extraordinary events in relation to the underlying stock may occur which have a dilutive effect on the value of the underlying. In certain circumstances Issuer / Counterparty has discretion as to the adjustments that it makes, if any, following corporate events.
Risk of Investment and Investment Suitability
- 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.
- 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 underly-
ing 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) 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.