The components of
a Good Decision.
YIELD ENHANCEMENT · CASE STUDY
Replacing Prediction with Robust Design
Should a successful investment depend on a favourable market outcome, or on a design capable of performing across a wide range of market conditions?
This case study illustrates how replacing prediction with robust design led to a better investment decision.
9%
COUPON P.A.
WITH MEMORY
3 YR.
MATURITY
SINGLE OBSERVATION
3
GLOBAL INDICES
WORST-OF BASKET
30%
LOW STRIKE
BARRIER
THE PAYOFF
STRUCTURE
3-year autocallable note, worst-of
UNDERLYINGS
S&P 500 · Euro Stoxx 50 · Nikkei 225
COUPON
9.00% p.a.
(with memory)
AUTOCALL
Annually, if all three indices are at or above their starting level
COUPON TRIGGER
85% → 77.5% → 70% (steps down each year)
CAPITAL PROTECTION
Full, down to a 30% decline in the worst performer at maturity
BEYOND THAT
Losses amplified at ~1.43x the excess decline
Capital is returned in full unless the worst index falls more than 30% at maturity.
WORST INDEX AT MATURITY
NOTE CAPITAL RETURN
-40%
$85,714
-30%
$100,000
-20%
$127,000
-10%
$127,000
0%
$127,000
10%
$127,000
Note capital return at maturity, versus the worst-performing index.
Illustrative, based on the terms above. Initial Capital of $100,000.
Follow Up Q&A
01
What happens if markets fall?
If the worst-performing index falls below the Capital Protection Level during the life of the investment, nothing happens. That level is observed only once: at maturity.
Capital remains fully protected against declines of up to 30% in the worst-performing index at that point. Beyond that, losses are amplified at roughly 1.43 times the excess decline. For example, a 40% decline at maturity results in a capital loss of about 14%, not 40%.
02
If, on an annual observation date, the worst-performing index is below that year's coupon trigger level, no coupon is paid. It is not lost, however.
The note has a memory feature, meaning any missed coupon is paid retroactively the first time a future observation clears the coupon trigger.
The coupon trigger also becomes less demanding over time, falling from 85% of the starting level to 70% by maturity. That makes it progressively easier for previously missed coupons to be paid.
03
Why a three-year maturity rather than a shorter one?
The main objective, in our view, is reducing risk to capital.
This is not a universally accepted view. A longer investment horizon does increase the probability of experiencing a market downturn at some point, and option pricing reflects that additional uncertainty.
What makes the case for three years different here are two features of the design. First, the note observes the Capital Protection Level only at maturity, not throughout its life. A decline in the first or second year does not, by itself, matter; what matters is where the worst-performing underlying finishes at the final valuation date.
Second, equity markets have historically recovered from most cyclical downturns over a multi-year horizon. Three years therefore provides considerably more opportunity for markets to stabilise before that single maturity observation.
The choice of underlying strengthens this argument. Broad equity indices are periodically rebalanced, with weaker constituents replaced over time. That creates a modest structural tailwind alongside the cyclical recovery effect. The conclusion could be different for individual stocks, where neither of those characteristics can be assumed.
04
Compared with a single-underlying note, it does introduce an additional source of risk: exposure to the worst-performing asset rather than just one. That is precisely why a worst-of structure pays a higher coupon than an otherwise equivalent single-index note.
A more useful way to think about it, though, is not as adding risk but as replacing it. A single-underlying note targeting the same coupon would typically require a significantly higher put strike, increasing the probability of a capital loss event. Using a worst-of basket allows that put strike to be pushed lower, meaningfully reducing the probability of a capital loss event.
The worst-of feature only becomes decisive if one asset materially underperforms the others. In a broad market downturn, however, major global indices tend to move together much more closely than they do under normal market conditions.
The decision to use a worst-of basket was therefore not simply about earning a higher coupon. It depended on the relationship between the chosen underlyings and the overall payoff design. In this case, the additional coupon compensated for the risk of lower correlation—precisely the risk that becomes less relevant in a broad market downturn.
05
How did it play out?
At the first annual observation, all three underlying indices were above both their coupon and autocall triggers. The note paid its 9% coupon, was automatically called, and returned the investor's capital in full.
The automatic redemption removed the need to make an active exit decision. It imposed a sell discipline that investors often find difficult to maintain on their own: a target return achieved over a pre-defined horizon, and the position closed.
At the same time, early redemption creates a new decision: how and when to reinvest. Whether to include an autocall feature, and how often to observe it, is therefore another design choice. In this note, annual observations struck a balance between providing opportunities for early redemption and reducing the frequency of reinvestment decisions.
The proceeds were reinvested into a broadly similar note with a slightly more demanding coupon trigger and a higher coupon of 10.2%.
06
What made this a better decision?
The structure was built to deliver its target return across almost every realistic market environment, which is what makes it predictable rather than merely optimistic.
That predictability also shapes what happens when markets do turn. A downturn during the note's life is not, in itself, a reason to act. The investor entered the investment knowing, from the outset, how severe market declines would need to be before the strategy could no longer deliver its intended outcome. The three-year horizon was a deliberate design choice, allowing sufficient time for markets to stabilise before a change of course might be required.
The note only needs the market to recover to the Capital Protection Level, not all the way back, to be made whole. Even in a severe scenario, capital losses remain limited and can typically be recovered relatively quickly. That removed the pressure to react.
Timing of entry is not a material factor. Because the structure is designed to perform across a wide range of market conditions, the odds of a positive outcome depend far more on its design than on when the investment was made.
*Qualified/Classified Investor, as defined in the Securities Law - 1968.
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