If a hawker outside a Hong Kong mass-transit station offers you an Iron Buddha teabag - have a read of the brochure that goes with it because it may well be about ABN AMRO's latest derivative offering. Yesterday, ABN AMRO launched its "Double-UP Protect Notes" which are designed to allow investors to enjoy twice the return of the underlying stocks in a rising market with an "air-bag protection mechanism" that helps investors reduce the risk of principal loss in a falling market.
The investment bank is offering two series of notes which are linked to baskets of blue chip stocks traded on the Hong Kong Stock Exchange. Investors can choose from A notes, which comprise of HSBC and Sun Hung Kai Properties; and B notes, which comprise of HSBC and PetroChina. The notes - the first of its kind in the Hong Kong retail market - are not capital protected. They have a short maturity of one year and will likely appeal to consumers who are more bullish in their outlook.
"Investors will potentially outperform the stock market by investing in this product, which links to leading blue chip companies, and enjoys double the return of the basket," says Polly Wong, director, private investor products of ABN AMRO. Upon maturity, the notes pay a maximum of 20% for A notes and 26% for B notes, if the closing price of each share in the relevant basket is greater than or equal to its initial price, plus the notes' face value. In the meantime, the air-bag protection mechanism helps investors reduce the risk of principal loss at the protection level, which is 92% for A notes and 79% for B notes.
Here's how it works: investors may receive the physical delivery of the worst performing share if the closing price of any share of the relevant basket is equal to or lower than its protection level on any trading day during the observation period - and if the final reference price of the worst performing share at maturity is lower than its initial reference price.
Currently, the market expects the Hang Seng Index to reach 16,000 by the end of the year and reach 17,000 in the next 12 months, offering a potential upside of 6%-12%.
"The stocks we selected are leading blue chip stocks in the Hong Kong equity market. Even if the market performs poorly, resulting in a negative performance of the share prices, investors would still have the opportunity to enhance their returns through this product or alternatively, receive quality stocks," Wong added of the structure she designed. This is the latest product to be introduced to local retail investors by ABN AMRO this year. Previous offerings include last month's launch of ABN AMRO Joyous Notes (Hong Kong's first ever FX-linked equity), and ABN AMRO Opus Notes, launched in March (capital protected notes that deliver a minimum return and unlimited potential upside).
The notes do not have any initial charge or management fee, with a minimum subscription amount of HK$10,000. They are open for public subscription between 16 August and 5 September 2005. The investment bank is advertising the product through Chinese-language newspapers and magazines, on commercial radio station one (CR1), and through hawkers handing out brochures (and tea bags, but of course) on street corners near MTR stations and in big residential areas.
Just as with the Joyous Notes issue, there's an everyday element to this subscription - supermarket savings. Investors with subscriptions of HK$50,000 are eligible to receive HKD100 worth of PARKnSHOP gift coupons or its cash equivalent, as a bonus. "We want to let people know that derivatives are not such a foreign thing," says Wong.
