FOR cautious investors hoping to make gains in equities without risking their shirts if things go wrong, Peregrine Strategy offers a new note. The 'principal guarantee zero coupon' Hang Seng Index-linked notes due in 1997 sound pretty complicated. What the notes do is provide exposure to Hang Seng Index movement while ensuring the initial investment is available to be paid back if things do not go right. The $500 million note is split. Half offers the cautious investor 100 per cent of principal back at the end of the life of the note should the index close below the strike level. On the upside, in the event the Hang Seng Index makes gains over the life of the note, the investor benefits from a 65 per cent participation in the equity index movement. The graph and table show the note for cautious investors has no downside in respect of the principal. The effective cost paid by the investor, apart from those linked to the product, is the dampened exposure on the upside if things go well, or the interest they might have gained if the money was put on deposit. With the second note, the investor is guaranteed only 90 per cent of the principal in return for a 100 per cent participation in the movement of the index. The graph and table indicate the downside on the note is 10 per cent of the principal, and on the upside, should the Hang Seng Index rise 100 per cent over the period, the note will return 90 per cent. What the investor is sacrificing when buying this note is the full upside available through buying the physical stocks or through trading via derivatives. If an investor is totally convinced the Hang Seng is going to rise over the next two years then this is the wrong product. It would be better either in physical stocks or in vehicles which offer leveraged returns. The obvious sacrifice made by an investor doing either of these two things is the level of risk taken on. In physical stocks the investor risks the value of the principal. In derivatives, the whole of the principal and more could be at stake. Some investors might ask in such an uncertain world how is it Peregrine can guarantee the value of the principal. What Peregrine plans to do with the money taken on the notes is to place a fairly sizeable proportion, about 85 per cent, into money market instruments. The yield on the instruments is expected to ensure the level of principal protected under the note can be repaid on expiry. The remaining bit of the money taken in is expected to be used in derivatives where exposure to the index can be gained through buying call options or trading futures. Exact details of the note can be obtained from the listing prospectus. The note will be listed on the stock exchange, providing investors with a way to trade these instruments should they wish. This provides another way investors can either make or lose money on the note. Because the note is listed, its value will be quoted on the exchange. Trading might see the note move to a premium or a discount on the listing price, depending on whether or not the note has some intrinsic value.