Monday, 16 May 2011 - 20:00
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An investment product that we have not really discussed is that of a structured product. In this first article, I provide a brief outline and introduction to just what is a structured product.
With the array of financial instruments available nowadays, including options, futures, forward rate contracts, zero coupon bonds, etc. There is any combination of payoff profiles that can be structured.
A typical scenario in creating and selling these structured products, is for an independent investment team outside or within a bank to design a certain payoff profile structure and for the bank or insurance company to then take this product to the retail market.
While the underlying workings of a structured product may be complex, these are not typically disclosed to the investor, nor indeed does he even need to understand them. This is because the bank or life company marketing the product, will package the product in such a way that it will create certain defined outcomes for the investor that are usually, but not always, relatively easy to understand.
By way of example, a typical retail structured product has an investor put down a lump sum for a period of 4 or 5 year with a financial institution. The payoff profile guaranteed back to the investor after the period of this time is the higher of the original capital and the return of a market index –usually capped at say 75%.
In this way these products appeal to investors looking for capital protection (i.e. capital remains intact in nominal terms over the defined period). At the same time it also appeals to the investor’s requirement for some growth linked to a specific equity index.
By interposing a financial institution between the underlying risky markets, investors have a greater sense of security and confidence in making this type of investment. For interest sake, take a look very briefly at how these structures are possible.
A typical structure
• An investor puts down R100 000 for a period of 5 years into a structured product. The example above uses R1000 over a 3 year period.
• The bank will use approximately 70% of the funds to buy a zero coupon bond. i.e. a bond that rolls up all its coupons to maturity so that after 4 or 5 years, the R70 000 is back to the nominal R100 000. This is the component that allows the bank to provide the guarantee on the initial capital.
• A smaller portion of the capital is then used to buy a call option (or various combinations) on a specific equity index. Should the market move up, value will accrue to the purchase of the equity option. This provides for the capped upside performance.
• Where however the particular index moves only nominally up, sideways or down, then the option will expire worthless, leaving the investor with his original capital – thanks to the zero coupon bond.
• Obviously within the defined payoff guaranteed, the bank or insurance company builds in its own fee.
This is very simply what can be achieved behind the scenes.
Ian de Lange
021 9144 966
Mon, 16 May 2011
World Markets (Spot Prices)
|JSE Top 40||17:00||28929.66||206.77||0.72%|
|JSE Indust 25||17:00||27832.75||140.56||0.51%|
|Rand / Dollar||19:57||6.9812||-0.0381||-0.54%|
|Rand / Pound||19:55||11.2974||-0.0271||-0.24%|
|Rand / Euro||19:55||9.9203||0.0376||0.38%|
|Rand / NZD||19:57||5.4660||-0.0536||-0.97%|
|Rand / AUD||19:55||7.4055||-0.0163||-0.22%|
|Yen / Dollar||19:57||80.7400||-0.1000||-0.12%|
|Euro / Dollar||19:58||0.7037||-0.0067||-0.94%|
|Dollar / Euro||19:58||1.4209||0.0133||0.94%|
|Pound / Dollar||19:55||0.6160||-0.0019||-0.31%|
Click here for the Sharenet Spot Price page
The JSE Today
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||30,944.86||160.81||0.52%|
|Oil & Gas ||27,335.10||37.81||0.14%|
|Oil & Gas Producers ||14,697.58||20.33||0.14%|
|Basic Materials ||30,652.82||285.63||0.94%|
|Forestry & Paper ||14,843.96||-57.29||-0.38%|
|Industrial Metals ||28,229.19||-34.75||-0.12%|
|General Industrials ||75,487.37||-270.44||-0.36%|
|Consumer Goods ||27,911.68||-11.02||-0.04%|
|Automobiles & Parts ||3,158.92||.00||0.00%|
|Health Care ||32,251.60||242.63||0.76%|
|Food Producers ||47,096.26||-88.16||-0.19%|
|Index Name||RP||Move||% Move|
|Personal Goods ||442.35||.40||0.09%|
|Consumer Services ||53,998.50||465.06||0.87%|
|General Retailers ||41,391.58||48.74||0.12%|
|Travel & Leisure ||3,672.43||-32.31||-0.87%|
|Support Services ||2,401.63||13.12||0.55%|
|Non-life Insurance ||32,008.80||-194.00||-0.60%|
|Life Insurance ||15,897.61||-22.45||-0.14%|
|General Financial ||2,251.56||7.59||0.34%|
|SHARIAH TOP40 ||3,202.57||28||0.89%|
|FTSE/JSE SHARIAH ALL||3,259.58||26||0.79%|
|FTSE JSE Fledgling ||4,520.87||-16||-0.35%|
|FTSE/JSE Alt X ||1,010.60||-20||-1.90%|
|SA LISTED PROPERTY ||370.55||0.66%|
|CAPPED PROPERTY ||310.72||0.55%|
|FTSE/JSE RAFI 40||6,712.85||38||0.57%|
|Capped Top 40||15,075.49||97||0.65%|
|Capped All Share||16,182.05||92||0.57%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|CMP||CIPLA MEDPRO SA LTD||SELL||11 May|
|ACL||ARCELORMITTAL SA LTD||SELL||11 May|
|SUI||SUN INTERNATIONAL LTD||HOLD||11 May|
|FPT||FOUNTAINHEAD PROP TRST||HOLD||11 May|
|AIP||ADCOCK INGRAM HLGS LD||HOLD||11 May||
|Expected||Company Name||Fin. Date|
|17 May 2011||CORONAT||March 2011 (Interim)|
|17 May 2011||CORONATP||March 2011 (Interim)|
|17 May 2011||GB LD||March 2011 (Q)|
|17 May 2011||GB LD OPT||March 2011 (Q)|
|17 May 2011||KELLY||March 2011 (Interim)|
|RES||Resilient Property Income Fund Ltd||17/05/2011||Confirmed|
|SAC||SA Corporate Real Estate Fund||17/05/2011||Confirmed|
|GFI||Gold Fields Ltd||17/05/2011||Confirmed|
|DTA||Delta EMD Ltd||17/05/2011||Confirmed||
Stock Exchange News Service
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