"Absolute Return CD" wtf

Discussion in 'Trading' started by IronFist, Jul 25, 2008.

  1. One of my family members is being given a sizeable amount of money to invest but the stipulation is that it has to be invested in one of a few choices of CD.

    Some of them are normal CDs.

    Some of them are Absolute Return CDs. I've never heard of this before. Basically it works like this:

    One is an S&P500 CD with a range of 16-18%. If at any point during 1 year from the day you invest, the S&P500 closes between 16 and 18% up from the original purchase date, you lose all your interest and you only get back your initial investment (altho you have to wait until the completion of the year to get your money back).

    Other than that, if it closes up or down any amount, you get the absolute value of that amount. So if it closes up 10% at the end, you get 10%. If it goes down 10%, you still get 10% interest. But if it closes up 16-18%, you get nothing back other than your original investment.

    I can't help but think that's not a good idea. At first it sounds like you're hedged against a declining market, but I bet quants came up with some algorithm to generate the 16-18% value such that the company actually makes money over time. If they thought the market was going to go down, they wouldn't offer this, because if it goes down 10% they would have to still pay people 10% interest.

    So is this a sham or a decent idea?
  2. Xuanxue


    I think the alleged family member is a fictitious character and who we're really on about is you; and since I already know you to be a selfish prick on one hand and looking for handouts on the other, there's nothing in it for me or anyone else answering you.

    Google it, asshole.
  3. Sounds like something a casino would dream up. I'm sure it is better for the bank than the customer.
  4. I seem to remember this kind of thing relating to arbitrage and 'collar' for the banks.
  5. MR.NBBO


    There are an immense number of special investment product classes, many are likely inhouse mark-ups of the public versions.
    In the end, these are usually structured so that the house will always win. These have been around for 5-7years, but have never gained much traction.

    Google for Accel return notes, principle protected notes, TIERS, MPS, etc etc etc, there are far too many to even list.
  6. rcj


    why screw around with the risk??
    Just get a saving acct at HSBC at %3.5 or higher.FDIC and you can add/take out any amt at any time with NO penilty.
    Interst is calculated on daily bal. They keep it simple.
    Make sure you keep it under 100K, though.

  7. wat

    If it was me I just would've said it was me. It would've taken less energy to type "I" than to type "a family member." And since I'm "looking for handouts" it stands to reason that I'm also lazy, and I'd rather type one letter than a few words.
  8. JamesJ


    in Europe there are tons of financial instruments like that...

    reverse convertibles (high interest unless share or index falls below a barriere within a period of time, then you get shares or index value at end of period)
    much money flowing into that stuff, good business for banks...
    and they construct newer and more complex stuff all the time...
    they look good but are expensive (but no private investor actually knows the true value of such a complex stuff)

    your construct is also very well known here, it's called Twin-Win (you win wether it goes up or down), however they usually have the barriere (your 18%) below the starting price and not an upper barriere...

    you can't imagine what stuff there is out there already... termsheets with several pages and complex mathematical formulas of pay off...
    then they say you have like 2% return garantueed and can get up to 20%/year.
    however for a high return there are so many criterias, which actually never really happen....

    people just underestimate the volatility, they think prices are smooth but more often than not barrieres get violated and the end up with huge losses...

    there have been some reverse convertibles on stock baskets with a "worst of" criteria...well one financial stock in the basket and the "investors" know got some crappy shares at a 50-80% loss...
    financial advisors sold them as secure ("you know they are all big companies, none of them will loose more than 40% during next year, they are blue chips and safe, and you will get your 10% return, it's much better than a savings account")....
    and people put there savings into that stuff...
  9. JamesJ


    attached an example of a twin-win termsheet. (with 2 barriers)
  10. Thanks JamesJ.
    #10     Jul 25, 2008