Credit Suisse links optimal entry notes to S&P 500; lookback feature an unknown, adviser says

By Kenneth Lim

Boston, May 12 - Credit Suisse's planned optimal entry accelerated notes linked to the S&P 500 index are a risky product that will perform only under a small range of scenarios, an investment adviser said.

Credit Suisse, through its Nassau branch, plans to price zero-coupon Optimal Entry Return Enhanced notes due Aug. 12, 2010 linked to the S&P 500.

The initial level of the index will be set at its lowest closing value in the first 90 days of the product. At maturity, the notes will pay par plus triple any gain in the underlying index against the lookback level, subject to a maximum total payout of 115% of the principal. Investors will lose 1% for every 1% that the index declines below the lookback level.

Complex entry feature

The optimal entry feature adds significant complexity to the product, although the investor probably faces little or no loss from its inclusion, the adviser said.

With the lookback level set at the lowest close in the first 90 days, the initial level of the index cannot be higher than a similar series of notes without the feature. A lower starting point increases the chances of higher returns and smaller losses. The lookback's biggest risk for investors is that the cap could be reached earlier, the adviser said.

"It's an opportunity cost after you hit the ceiling," the adviser said. "If the index goes higher, I can't get any more than 15%. I'm losing out relative to buying the shares myself, or buying a straight accelerated growth note without this lookback where I can probably get a higher ceiling."

Hitting the ceiling is not a trivial probability, the adviser added.

"We've already gone up more than 10% this quarter alone," the adviser said. "The market's volatility is so high right now, all the barriers and thresholds aren't as wide as they appear to be."

Small optimum band

The product will work best for investors only under certain conditions, the adviser said. If the index bottoms out in the first 90 days and gains only moderately after that, investors are likely to get the best out of the product, the adviser said.

But if the index gains too quickly or falls below the lookback level, investors could lose capital or miss out on gains in the underlying index.

"The lookback gives you a bit of cushion at the start, but you don't know how much you have and you're still concerned about how the underlying asset performs for the rest of the product's life," the adviser said. "It's like a buffer that's determined at the start of the product, but you don't know what that buffer is."

Alternatives matter

Investors could have a tough time figuring out whether the notes make sense because the starting point is such a big unknown, the adviser said.

"You don't know the risk of hitting the ceiling," the adviser said. "The risk of losing some of your investment, not knowing that isn't a concern...I know it won't be worse than if I use the Day 1 price."

The risk of hitting the cap is important for investors to determine if the product is the right one for them, the adviser said.

The question is whether the notes are the best investment option available. Some products could offer better upside because they do not have the lookback feature, while others could offer better downside protection, the adviser said.

"It's not just, 'Is this a good product,' but 'Is this the best product?'" the adviser said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.