Structured Products

Easily Explained

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Capital Guarantee without Cap

A Capital guaranteed product without cap is composed of a zero-coupon bond and a call option. The capital guarantee part is assured by the zero bond, and the participation is enabled through the call option.

Capital guaranteed products allow the investor to participate to the positive performance of an underlying (i.e. a stock, an index, a commodity, an interest rate...) without risking the downside. At maturity, the minimum redemption amount is the invested capital times the capital guarantee (usually 100%, but it varies from one product to another; can be above 100% or below). Note that the capital guarantee is effective only at maturity. During its lifetime, any capital guaranteed product can be valued mark-to-market below par. The lowest a capital guaranteed product can be valued at, is its bond floor. However, the bond floor itself can vary according to the level of the interest rates during the life of the product. Important to know, is that the delta of a capital guaranteed product without cap and full (100%) participation lies as a rule of thumb at around 50%. This means that at inception, the product will only rise by 50% of what the market rises.

Payoff features

The capital guaranteed product is built (in its most basic form) by means of a zero-coupon bond and a long call, the latter with a strike usually at the money. Both the bond and the call have the same maturity. With a 100% participation, the investor will fully participate to the positive performance of the underlying without incurring the risks.

If the capital guarantee level is below 100%, say at 95%, then 5% of the capital are at risk. Additionally, the first 5% of the performance of the underlying asset at maturity are lost, so the performance must amount to at least 5% to break even, unless the strike of the call option is also placed at 95%. More information about how capital guaranteed products function, in particular during their lifetime, can be found in the article "The behaviour of capital guaranteed products during their lifetime", published by the author in March 2010.

  • Buy a capital guaranteed product if you are strongly risk-averse or cannot afford to lose your capital, but wish to participate to the price appreciation of an asset you believe will rise in the medium to long term.

  • Buy a capital guaranteed product if you think that you have superior asset selection skills, but you would not like the market's trend interfere with your results.

  • Invest in a capital guaranteed product as either a bond replacement product or a balanced portfolio replacement product. Your opportunity cost will be the missed yield and / or dividend on stocks.

  • Consider the maturity carefully; capital guaranteed products are poorly suited for trading and should be held until maturity. Thus the maturity of the product should loosely match your investment horizon.

  • Sell your product if the issuer's rating drops below a level that you deem acceptable (usually investment grade, S&P rating of A- or lower). 

  • When interest rates are low but volatility is also low, shorten the product's maturity as much as possible and lower the capital guarantee as well as the strike of the embedded call option.

  • Don't buy a capital guaranteed product with a capital guarantee of less than 80% - 85%, unless the strike of the call option is also near the capital guaranteed level. Otherwise, too much performance gets lost.

  • If you are an investor taxable in Switzerland, don't buy products with too long maturities, otherwise the tax burden might become higher than you expect the underlying asset to perform.

  • Also, capital guaranteed products with longer maturities are strongly influenced by changes in interest rates. Don't buy longer maturity products if you think that interest rates will rise sharply.

  • Don't buy capital guaranteed products where the participation rate is lower than 60% - 70%, unless your scenario is very, very bullish.

  • Don't buy a capital guaranteed product from an issuer with a rating below A-. Remember that you bear the issuer risk, so if the issuer goes bust, your product will be worthless, no matter the performance of the underlying asset. As the capital guaranteed product's maturity lengthens, the issuer's rating becomes more important.

Main influence factors                    
  • Interest Rates: the more the interest rate of the reference currency increases, the lower the mark-to-market value of the zero-coupon bond. Even though the bond will be worth 100% (par) at maturity, its mark-to-market value will be impacted negatively by rising interest rates. The longer the time to maturity, the greater the impact.

  • Volatility: rising volatility is beneficial for the product, because the holder of the capital guaranteed product is long the call option.

Classical variants
  • Products with less than 100% capital guaranteee: they offer a higher participation, but the the first X% (X being the difference between 100% and the product's capital guarantee level) are lost. The break even is reached only when the underlying has performed by X%.

  • Products with minimum guaranteed coupon: the products are 100% capital guaranteed, pay a minimum coupon of 1% or 2% and some participation to an underlying asset. The participation is lower than with a version without minimum coupon. It's a matter of taste, but including a minimum coupon is not something I recommend. You could actually replicate the minimum coupon by investing less in the product without coupon (and raise the participation) and place the remainder into money market earning full yield.


Beware of products labeled in low-yielding reference currencies (like most G7 currencies today (2007)) with relatively short maturities, say 3 years or less, and 100% capital guarantee plus a participation on some stock index or some basket of stocks. Remember that the only source of value for buying the call option generating the participation is the interest of the zero bond. If that value is low, then the participation is also of little value. Therefore, even if the participation (or potential coupon, if any) seems attractive at first glance, the actual chances of the described optimal scenario materializing remain very small. The products that appear to be too good to be true usually have a catch somewhere.