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Structured Products Canadian Annual Derivatives Conference August 17 th -19 th 2005 - PowerPoint PPT Presentation

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Structured Products Canadian Annual Derivatives Conference August 17 th -19 th 2005. Why Structured Products?. Access to strategies unavailable to Mutual Funds Repackaging of securities Tax benefits Access to offshore securities and funds Access to enhanced manager ‘tool kit’

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Structured Products

Canadian Annual Derivatives Conference

August 17th -19th 2005

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Why Structured Products?

  • Access to strategies unavailable to Mutual Funds

  • Repackaging of securities

  • Tax benefits

  • Access to offshore securities and funds

  • Access to enhanced manager ‘tool kit’

    • short selling

    • options

    • derivatives

    • Leverage

  • Exposure to previously unattainable investments

    • Offshore property

    • Hedge Funds

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Forms of Structured Products


  • Income Trusts

  • Split Share Corporations

  • Closed End Funds

  • Flow through LP’s

  • Exchange Traded Funds (ETF’s)


  • Market linked instruments

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Listed Structured ProductsEnding Dec 2004: -$41.5 Billion-3% of TSX -228 products

Source: TSX Group Inc.

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Listed Structured ProductsEnding Dec 2004: -SP’s: $9.5B-Corp: $3.2B -IT’s: $2.9B

Source: TSX Group Inc.

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Unlisted Structured ProductsGrowth yr/yr: ML GICs: -0.5%Linked Notes: 29%

Source: Investor Economics

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UnlistedStructured Products

Source: Investor Economics

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Unlisted Structured Products

Source: Investor Economics

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Principal Protectednotes

  • A debt security issued by an agent (Investment manager and backed by a guarantor (usually Schedule I or II bank)

  • Guarantees 100% of principal if held to maturity (a range of 6 to 10 years)

  • At maturity, pays original principal plus appreciation from the underlying ‘linked’ asset.

  • May pay a coupon (variable or fixed) with no correlation between value of this coupon and return of the underlying asset

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PPN underlyingassets

Underlying assets that are ‘linked’ to notes include:

  • Mutual funds

  • Group of funds

  • An index

  • Basket of equities

  • Pools of income trusts

  • Hedge funds

  • Funds of funds

  • Emerging markets

  • Currencies

  • Commodities

  • etc

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Growth in PPN’sCAGR since Dec 1999: 70.3%

Source: Investor Economics

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PPN’s: two approaches1.Zero Coupon Bond

  • Strip bond with option: (example $100 note)

    • $70 into zero coupon or strip bond

    • $30 into long term option on underlying asset

    • Leverage x option ≈ $100 notional exposure to asset

  • Issues:

    • A Low interest environment requires large portion of the investment to be applied to zero coupon bond

    • May not get leverage on call option to get $100 notional exposure

    • Call option tied to expected volatility of asset (conservative but can be costly)

    • Selling before maturity can be costly as the strip bond is heavily discounted to start.

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PPN’s: two approaches2.Constant proportion portfolio insurance (CPPI)

CPPI (a monitoring approach)

  • Two components

    • Underlying investment

    • A guarantee, notionally related to a zero coupon bond that matures at 100%

  • Formula monitors the NAV of the underlying asset against a reference curve or ‘floor’ that increases over time.

  • Starting floor value = cost of zero coupon bond calculated to yield 100 at maturity. Over time, zero coupon bond cost increases.

  • As long as the investment NAV remains a specific distance above this floor (delta), all cash is kept in the investment.

  • Allows for leverage to be applied if NAV gains in value and removed if NAV falls below the delta (dynamic leverage)

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Example: 8 yr term, $100 note

At Time 0:

Annual yield on 8yr zero coupon bond = 3.0625%

Over 8 years this = 24.5%

Cost of zero coupon = $75.50 (floor) rises over time

Starting delta (distance between zero coupon cost and 100) 100-75.50 = 24.5

To keep $100 in the investment, the NAV of the investment must not fall below 24.5% above the floor.

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De-leveraging begins

Knock out



Asset return

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  • Some enhancements to the CPPI structure:

    • Lock-ins to periodically crystallize gains above the delta

    • Payouts or coupon payments (return of capital until initial capital amount met)

    • Options on CPPI for offshore exposure within FIE constraints

    • Conversion of income to capital gains through derivatives

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  • Credit rating of guarantor

    • Mitigated by using rated schedule I and II banks

  • Level of participation in underlying asset

    • CPPI investment can be reduced by poor initial performance (de-levered). Harder to get back returns due to lower investment base

    • locked out early (end up sitting in a bond for a few years)

      (assessment of underlying asset is very important !)

  • Cost of guarantee

    • Driven by interest rates

      • lower interest rates = lower yield = higher cost of guarantee

  • In unlisted PPN’s, the secondary market is at the mercy of guarantor (availability, gates, discount)

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Structured Product:Fees

  • Strategy dependant on value of CPPI structure to an investment

  • Fees for guarantee (discounted to pay guarantor)

  • Fees for option

  • Plus trailers, expenses, management fees, front end fees and commissions to investment manager and advisor etc

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More information & Acknowledgements

  • TSX Group (

  • Investor Economics (

  • Fund Library (

  • Investment executive (

  • AIMA (

  • Various regulators

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Thank you

Contact details:

Andrew Doman

Chief Operating Officer

Abria Alternative Investments Inc.

20 Adelaide Street East, Suite 300

Toronto, Ontario, Canada

M5C 2T6

Tel: 1-416 367-9993

Fax: 1-416 367-4555