TABLE OF CONTENTS The reasons for using equity-linked structured products are many and varied. Corporates may be motivated by the need to raise capital at a competitive rate of interest, to fund a merger or acquisition or to manage their balance sheets. Whatever an individual company s reason for using such instruments, cost of capital, capital management and tax considerations are usually of prime importance. These days though even individual investors are using these products as tools that can help to attain their investment goals. In times when equity markets are bullish this might be to forego interest on a deposit account in order to participate in stock market growth. When stock markets fall, investors funds may be divided between a bond paying a high coupon and equity index participation with a guaranteed return of investment. The paramount goals for the individual investor will be to obtain a higher rate of interest than that available from their local building society/mortgage or bank deposit account, or to participate in rises in a stock market index or maybe both.
A good starting place, and perhaps one that can be described as traditional, is the well-known convertible bond. These instruments, however, have moved on considerably from their original function, namely exchange of a debt instrument for equity, and can possess features which make them difficult to price and hedge effectively. This complexity, however, can in turn lead to potential arbitrage opportunities for other market players to exploit.
Convertible bonds (CBs) represent an...
