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Friday, August 31, 2007

Equity or Currency Link Insturments

Dear Mr Tan,

I like to know your views about equity and current linked investments that are issued by the banks. There are for a period of 2 to 4 weeks. They estimate a return from 4 to 15%.

For example, Product X with a spot price $3.60 is offered with a strike price of $3.40. If, after 4 weeks, the securities is above 3.40 your get 13.7% yield. If the security falls below $3.40 you will get the securities and of course suffer a paper loss.

What do you think of this type of instruments and are worthed investing in?

REPLY:

This is a structured financial product. My views of this type of product, in general, are described in the following FAQ.

Generally, I advise people to avoid any product that they do not understand. It is difficult to calculate the probability of a negative event, and the potential amount of the loss. So, you should avoid this type of product.

I believe that the issuing bank takes away a large margin for their profits. They will leave you with a low return and a high risk.

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