UBS has created an interesting structured note to give
exposure to overflowing Corn markets. Corn markets are seeing bumper crop
yields and prices are trending downwards. For latest corn news on bumper crop
yields: http://www.agweb.com/crops/corn/.
Prospects of bumper harvests sent Chicago futures tumbling into
bear markets in July2014, two years after a drought eroded output and sparked
the highest prices ever. Cheaper grain is bolstering profit for buyers
including Tyson Foods Inc. and Archer-Daniels-Midland Co., encouraging some
cattle producers in the Great Plains to expand herds, and eroding income for
farmers who say increased output will make up for some of the slump.
Corn is typically traded on futures market. CBOT http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn.html.
In anticipation of higher corn crop yields futures have been
trending down.
Investing Opportunity:
Investors in futures market can short the futures to monetize their view
on the rising crop yields. Retail investors can get exposure to this market
using structured notes. UBS has done exactly the same by creating am inverse structured
note that gains when the corn prices fall and vice versa.
Investment problem: Gatick global solutions has analyzed
this note using our quantitative metric and found interestingly this note has
chances of losing more than 100 percent of your investment. We wanted to look at whether this is possible
and under what situations.
In this investment, returns are structured as follows
Note will be called on
each of quarterly observation dates with a 5% return on 1st
observation date, 10% return on 2nd observation date, 15% return on
3rd observation date and 20% return on 4th observation
date respectively, if corn price is less than initial price of 356.75.
This is a good feature, as investment will mature soon if
the corn market behaves as expected and generates more crop and lower price.
That is why auto callable feature is an autopilot feature to protect the
investment.
if notes are not
called and on the maturity if the note is above the initial level, then
investor is protected from rise in the corn price up to 23% of the initial
level. Above trigger level of 23% onwards, this note will participate 1 to 1 in
corn price performance.
Interestingly, here the problem arises, if the corn price
rises above 100% on the expiration date then the investor is losing investment
of more than 100%. In this note, if the final future price settles above 713
cents then the investment will start loosing above his investment. (In other
words he might have to pay the Issuer on the note).
Retail Investors should be cautious and have to understand
the inverse risk profile of the note before they invest in the note.
For further details, refer to the structured note investment
analyzer.
