· How was this structured for from the seller perspective? · How was this sold from the seller perspective? · What vehicles would have been needed to manage the risk from the seller’s perspective? ·...

1. Structure form the seller perspective –
In the capital protection note, two components are there – 1. Bond, 2. Equity
The bond component is used to ensure that the principal is protected and after the given period of the note, the principal is returned to the shareholders. However, this is generally in the form of the zero coupon bond, where the price is lower than the principal and hence, the remaining amount can be invested in the equity option to boost the return. Generally the bonds, only yield a return equivalent to the yield to maturity of a given note and the equity index will provide the boost to the returns.
Here, from the seller’s perspective, the equity funds will be invested in the equity index and remaining in the liquid funds which could be liquidated to protect the principal. Here, the issue price of the certificate is $ 100 and its price will be based on the
2. From the seller’s perspective, it was sold using the proposition of the principal protection. Seller in the note, mentions that in case the sustained losses from the equity markets, which in the emerging markets seem to be very lucrative, the funds will be divested from the equity markets to liquid funds to ensure that the principal is protected from the fluctuations and the returns will be lesser in that case. But in case the total return index outperforms, then the buyers will be better off.
3. Vehicles needed to manage the risk from the seller’s perspective–
a. Since we will be investing heavily in the equity markets, we can hedge the risk by taking the positions in the derivatives markets like options.
b. Rigorous screening processes to ensure that the financial metrics of the companies are well and good and the companies are...