Structured Products

Easily Explained

Get Adobe Flash player

Shark Notes

Shark notes are classified as short term capital guaranteed products that include a knock-out barrier; they sometimes  feature a "rebate". They can serve two purposes, depending on the way they are structured:

a) Either to capture upside potential on any given underlying (i.e. an index or a stock), in which case the rebate is small or zero and the barrier very high, making a knock-out (or barrier event) unlikely.

b) Or they are structured in a way to outperform bond yields, in which case the barrier is placed at a relatively low level, and the rebate is greater than the relevant bond yield on an annual basis.


Shark notes are built using a zero-coupon bond plus a long up&out call option, both options having the same time to maturity. The up&out call has a barrier embedded, which, if breached, "kills" it. All participation accumulated once the barrier is breached is lost. Most Shark notes feature a "rebate", which is a predetermined lump sum paid at maturity to the holder of the product if the barrier has been breached. Once this has occurred, the product behaves like a bond, irrespective of the further price evolution of the underlying asset (dotted line on the graphic).

Advantages and use

The main advantage of shark notes is their ability to reduce risk while staying exposed to the underlying. asset In the worst case the product is redeemed at the capital guarantee level at maturity. They can be used as bond replacement (place a low barrier and a rebate above bond yield and hope to get knocked-out) or as an equity replacement when markets are thought to be at lofty levels (place a high barrier and no rebate).They are best used in moderate bullish markets because they offer a 100% participation until a certain cap level. They also serve well when a toppish view develops, but upside exposure is still wished for. In falling markets when a rebound is expected the capital guarantee will protect any timing misjudgment.

How do Shark Notes function?

There are three payout scenarios at maturity (we take here the example of the bull market view, but it is perfectly conceivable to build a Shark Note with a bearish participation):

  1. Scenario 1: the underlying asset(s) develop negatively, and no barrier breach happens during the lifetime; redemption occurs at 100% of capital guarantee.
  2. Scenario 2: the underlying asset(s) develop positively, but not over the predefined barrier; redemption occurs ath 100% of capital guarantee plus full participation.
  3. Scenario 3: the underlying asset(s) develop positively, but hit the barrier; redemption occurs at 100% of capital guarantee plus rebate, if any.
  • Do structure Shark Notes with a relatively short maturity ranging from one year to 18 months. Their zero bond floor is rather high and therefore the impact from changes in interest rates remains small.

  • Use a high barrier and no rebate if your goal is to participate to a risky asset (i.e. a stock index or a commodity).

  • Use a low barrier and a high rebate if your goal is to generate bond yield outperformance. Why? The answer is in the book "How to invest in Structured Products".

  • Don't buy a Shark Note with a maturity longer than 2 - 3 years. The additional time beyond the second year will generate little added value to the product .

  • Don't invest in a Shark Note with the goal to exit quickly after the market gained a few percent or so. A shark note's delta is very small (5% to 10% at the beginning of the product's life) until at least two-thirds of its lifetime have elapsed.

Classical variants
  • Bearish shark notes with rebate: instead of a participation with a knock-out to the upside, an absolute participation and a knock-out to the downside is embedded in the product. The construction elements are a zero-coupon bond plus a long down&out put with rebate.
Opportunity losses

The opportunity loss really depends on your strategy. If you are trying to participate to the risky asset (i.e. a stock index or a commodity index) while limiting your risk, then your opportunity loss will be the foregone dividends and the potential participation loss if the barrier is breached. If your strategy is to beat a bond yield return, then your opportunity loss is the lost coupons a bond with similar maturity and credit rating than the issuer would have generated.

Shark notes are not optimal when markets are thought to be strongly bullish because when the barrier is hit, the investor no longer participates further to the upside.