FIXED COUPON
NOTES
(FCN)
STRUCTURED PRODUCTS
A structured product, also known as a market-linked
investment, is a pre packaged investment strategy based
on:
■ A single security
■ A basket of securities
■ Options, Indices, Commodities, Debt issuance or
Foreign currencies
■ Derivatives.
DERIVATIVES
A derivative is a financial security with a value that
is reliant upon or derived from an underlying
asset or group of assets. The derivative itself is a
contract between two or more parties based upon
the asset or assets. Its price is determined by
fluctuations in the underlying asset.
Why would you need a Structured Product?
YIELD ENHANCEMENT
CUSTOMIZATION – There is a
structured product for every risk profile
possible
ACCESS TO NEW MARKETS
FIXED COUPON NOTES (FCN)
Allan sends his kid to a tuition teacher to
study Physics, Chemistry and Maths.
The tuition teacher assures Allan that at the
end of this year, the kid’s performance will
reach 110% of where it was in the previous
year.
Allan makes a deal with the teacher:
If the performance in all subjects is above
110% (of previous year performance), the
teacher gets the fees and a pre-decided bonus
amount from Allan, and the tuition
arrangement ends. (KNOCK-OUT Situation)
Also, the teacher tells Allan that if at the end
of the year, the performance of the student is
below 90% (of previous year performance),
he will pay a pre-decided amount to Allan.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 TEST 1 – Inst. 1 Due
01-Jul-19 TEST 2 – Inst. 2 Due
01-Oct-19 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 TEST 2 – Inst. 2 Due
01-Oct-19 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 73 62 85 TEST 2 – Inst. 2 Not Due
01-Oct-19 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Date PHYSICS CHEMISTRY MATHS
Previous Year Scores
01-Jan-19 60 70 80
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 73 62 85 TEST 2 – Inst. 2 Not Due
01-Oct-19 65 71 87 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 73 62 85 TEST 2 – Inst. 2 Not Due
01-Oct-19 65 71 87 TEST 3 – Inst. 3 Due
01-Jan-20 62 61 70 FINAL EXAM – Last
Inst.
Because of the poor performance of the
student in 2 subjects in the final exam, the
teacher needs to pay some amount back to
Allan. Also, Instalment 2 is not paid
because the performance in 1 subject is
below 90% of previous year performance.
To deal with such a situation, the teacher
introduces a KNOCK-IN feature into the
arrangement
KNOCK-IN occurs if the worst
performance is below 80% of previous
year performance
If the performance never goes below 80%,
the teacher still gets paid in full.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Knock-In 48 56 64
(80%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 TEST 1 – Inst. 1 Due
01-Jul-19 TEST 2 – Inst. 2 Due
01-Oct-19 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Knock-In 48 56 64
(80%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 TEST 2 – Inst. 2 Due
01-Oct-19 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Knock-In 48 56 64
(80%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 63 62 85 TEST 2 – Inst. 2 Due
01-Oct-19 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Knock-In 48 56 64
(80%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 63 62 85 TEST 2 – Inst. 2 Due
01-Oct-19 65 71 87 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Knock-In 48 56 64
(80%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 63 62 85 TEST 2 – Inst. 2 Due
01-Oct-19 65 71 87 TEST 3 – Inst. 3 Due
01-Jan-20 62 61 70 FINAL EXAM – Last
Inst.
Now that all the performances are above the
Knock-In level, the teacher gets paid in full.
By introducing the Knock-In feature, the teacher
has made the arrangement less riskier for him,
which means that the overall fees for the
arrangement will go down.
What happens in case of a
Knock-Out?
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Knock-In 48 56 64
(80%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 TEST 1 – Inst. 1 Due
01-Jul-19 TEST 2 – Inst. 2 Due
01-Oct-19 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Knock-In 48 56 64
(80%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 TEST 2 – Inst. 2 Due
01-Oct-19 TEST 3 – Inst. 3 Due
01-Jan-20 FINAL EXAM – Last
Inst.
STRIKE 54 63 72
(90%)
Knock- 66 77 88
Out(110%)
Knock-In 48 56 64
(80%)
Date PHYSICS CHEMISTRY MATHS
01-Jan-19 60 70 80 Previous Year Scores
01-Apr-19 64 75 83 TEST 1 – Inst. 1 Due
01-Jul-19 63 80 85 TEST 2 – Inst. 2 Due
01-Oct-19 The teacher gets
paid in full before
01-Jan-20 the tenure of the
arrangement ends.
Let us now see how this FCN
works in the Financial Markets
• An FCN is issued at par, and the investor receives
coupon payments until redemption or maturity.
• It is a basket product, and the baskets are generally
of 2-4 shares.
• In case of a Knock-out on any valuation date, the
client receives 100% of the principal and the latest
coupon payment.
• If the worst share of the basket performs
below the strike level on any of the
intermediate valuation dates, the client
doesn’t receive any coupon for that period.
• If the worst share of the basket performs
below the strike level on the final valuation
date, the client receives shares of the worst
performing underlying at the strike price.
Knock-In is a safety feature for the client.
If the worst performing underlying never
trades below the Knock-In level, the client
will never receive shares.
However, as you lower your knock-in level,
the product becomes less riskier, and
hence, pricier.
BENEFITS
Receive regular coupon payments.
In case of a knock-out, get your money back early and
reinvest directly in the market.
RISKS
Your principal is not protected.
Gains are limited to the pre-decided coupon.
Constant exposure to credit risk of the issuer.
