Sunday, December 1, 2013

Accelerated Notes on Silver Spot price by Bank of America

Accelerated Return Notes – Silver Spot Price priced on October 31, 2013 contributed By Karthik Misra


Recently, there has been significant buzz around silver and associated issuance in the structured note market. Bank of america has been issuing to investors leveraged structured notes tied to silver contracts. This note has been deconstructed into its components and understand the mechanics of risk and reward for this note. 

This Accelerated Return Note was priced by Bank of America for $10.00 totaling a public offering of $13.19 million on the spot price of Silver with a maturity on January 2, 2015. Silver is a precious metal second only to gold that comes to consumer minds in terms of jewelry. It is also used in far more applications than gold such as currency, dentistry, photography, electronics, biology, medicine and much more giving it significantly important status. This kind of extensive use in applications and lower spot rate would make it a good investment for bullish investor who anticipates that the market is near a turning point. In the investors mind silver, and gold, have a more stable retention of value than currency in a major shift like the current change of the head at the Federal Reserve.

 The advantage of this note is the 3-to-1 upside exposure. Meaning each percentage moves up would result in a three percent increase in returns. The downside is the return cap at 22.50% above the par value of the underlying asset. Followed by the 1-to-1 downside exposure the return has should the silver spot value go south.

To replicate the note investors would need to need to long a call with a strike at $100. This should accelerate the returns 3-to-1. They would also need to long a digital call with a strike at $120.00 to cap off the return at 22.5% of total return. Since the note has a 1-to-1 decline there is nothing needed to replicate the decline. 



The credit risk for this note is based on Bank of America’s credit. The market risk is a reflection of The London Silver Market or the Silver Spot Price meaning it is based on a commodity. This means that there is no daily price limit to the spot price of silver to act as a safety net. There is also the volatility involved because it is an indicator of monetary confidence, along with gold, to the global economy. To add to that volatility there is also industries silver is used in as a material. This is an important volatile commodity to say the least. This note is for a bullish investor who believes there will be a decent increase in the market spot rate for silver. Because of the low cost of each note, at $10.00, the buyers are willing to take a cap on the returns. This along with the bullish nature means that the investor expects the market to be higher.

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