Structured & Hybrid Products

Almost any structured payoff = zero-coupon bond (for principal/coupon delivery) + portfolio of options (vanilla and/or exotic) on the underlying. The bond sets the risk-free floor; options shape the payoff.

PPN = zero-coupon bond (returns principal N at maturity) + long call on the underlying with participation rate p. Payoff at T: N + p·max(S_T − K, 0). The bond guarantees the floor; the call provides upside.

Issuer raises N today, sets aside PV(N) = N·e^(−rT) for the bond, and uses the remainder N − PV(N) (minus fees) to buy calls. Participation rate p = (N − PV(N) − fees) / call_premium. Higher r or longer T → more money for options → higher p.

Reverse convertible = zero-coupon bond + short put (struck near spot) on the underlying. Investor receives an above-market coupon (the put premium) but loses principal if S_T < K. Payoff: N·min(1, S_T/K) + coupon.

ELN payoff at T: N·[1 + max(floor, min(cap, p·(S_T/S_0 − 1)))]. Decomposition: bond + long call at K_floor − short call at K_cap (call spread on participation), with the floor often = 0 (principal protection).

On scheduled observation dates t_i, if S_(t_i) ≥ autocall barrier B_AC, the note is redeemed early at par plus accumulated coupons. Otherwise it continues. At maturity, if no autocall triggered, principal repayment depends on a knock-in barrier (often a down-and-in put).