Equity-linked instruments have a profit yield flip side
They can potentially offer higher returns than bank deposits but carry a risk level similar to the security
While equity-linked instruments are generally considered to be a bear-market product, they can also offer profit opportunities in a bull market, either in the form of yield or capital gain, one industry expert says.
Equity-linked instruments (ELI) are structured to offer a potentially higher return than bank deposits, but have a risk level similar to the underlying security.
In volatile market conditions ELIs are less volatile than the underlying product, while in a static market they can provide a higher yield than a direct equity investment.
In a bull market the instruments are less popular as investors generally believe they would be better off trading shares or warrants directly. However, investors can benefit from ELIs even in a bull market.
'Investors can earn yields as high as 30 per cent if they buy a bull ELI with a strike price very close to the spot price of the underlying stock on the ELI issue date,' said Moses Lui, associate director of equity derivatives sales at Macquarie Equities (Asia).
Normally, the strike price on a bull ELI is set at an average discount of about 7 per cent to the underlying security on the issue date, Mr Lui said in an interview with the South China Morning Post. But as investors are becoming more bullish about the equity market, they are getting more aggressive in asking for smaller discount rates of about 3 to 5 per cent in the search for higher yields, he added.