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Reverse Equity Linked Notes (RELNs)
At a Glance
Ability to express a particular view on market price movements
Different types of payoffs available
Potential to earn an enhanced return if the performance of the underlying financial instrument is in line with the expected view
What are RELNs?
RELNs are a type of structured note. Investors may use this structured note when they want to improve returns from their portfolio of stocks when their view of the market is stable or mildly bearish.
If they had a strongly bearish view, they might prefer to sell the stocks outright at the prevailing market price.
Who are RELNs Suitable For?
RELNs are suitable for investors who have a stable or mildly bearish view of the market. Investors would typically invest in an RELN when the underlying stocks involved are outside the dividend payment period. Otherwise they would lose out on dividends paid during the period their stocks are deposited for the RELN.
RELNs are sophisticated investment products that carry significant risks and are not suitable for investors who do not comprehend the product or are risk averse.
How do RELNs Work?
Investors deposit the chosen stocks from their portfolios for the RELN's tenor. The stock's market value at the time the note is issued represents the principal.
The RELN has a strike price, which is at a premium to (or above) the “spot” market price. For example, a 105% “strike” means that the RELN issuer will take ownership of the deposited stock if the “spot” goes above 105% of the initial price. The investor will be paid in cash the principal in addition to an agreed interest amount.
If the “spot” for the deposited stock is at or below the “strike”, the investor receives his deposited shares plus a cash amount representing the interest earned.
Illustrative example of an ELN with one underlying share:
|Scenario||Company A |
|At or Above Strike Level||Redemption|
|1||105%||Yes||Initial investment + Yield|
|2||92.5%||No||Company A shares|
Benefits of RELNs
|Enhanced yields may be earned if the investor’s view of the underlying equity is correct.|
|A RELN can be tailored to suit the investor’s needs, based on his/her choice of parameters, such as the underlying equity, strike price, and tenor.|
|A RELN’s tenor may range from 1-3 months.|
Risks of RELNs
|RELNs are issued by financial institutions and investors are exposed to the credit risk of the issuer.|
|Occurs if the stock is “called” by the RELN issuer if its market value rises.|
To understand the product-related terms, visit our Glossary.
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