Payout Scenarios
Last updated
Last updated
Investors should familiarize themselves with the four possible payoff scenarios of VETA's FCN product. The following diagrams illustrate the distinct characteristics of these four payoff scenarios. For exact definitions of the terms used in each diagram, please refer to the accompanying explanationsGlossary of Terms.
In the analysis of the payoff scenarios below, it's assumed that the example FCN product (with a knock-in mechanism) has the following characteristics:
Principal: $10,000
Tenor: 6 months
Knock-out Observation Frequency: monthly knock-out observation
Underlying Asset: BTC
Coupon: 10% (annualized)
Knock-in level: 80%
Put strike level: 80%
Scenario 1: Knockout on Knockout Observation Date
Scenario 2: Never Knocked-in and Knocked-out
Scenario 3: Knock-in Occurred, No Knockout, and Final Settlement Price Exceeds Put Strike Price
Scenario 4 Knock-in Occurred, No Knockout, and Final Settlement Price Below Put Strike Price
During the running period of the product, if the underlying asset price is higher than the knockout price on a knockout observation day, regardless of whether a knock-in event has occurred during the term, the product ends. In the schematic below, BTC price is higher than the knockout price on the knockout observation day of the 4th month, triggering the knockout, and investors receive full principal and annualized coupon payment.
Investor's return:
Coupon income = $10,000*10%*4/12 = $333 (for 4 months)
Principal = $10,000
Total return = $10,333 (for 4 months)
Yield = 3.3% (absolute yield for 4 months)
The product during its running period needs to satisfy the following two conditions simultaneously: (1) On each knock-in observation day, the knock-in observation price of the underlying asset is higher than the knock-in price; (2) On each knockout observation day, the knockout observation price of the asset is higher than the knockout price. In this case, investors can get the principal and the interest of the entire term of the product.
Investor's return:
Coupon income = $10,000*10%*6/12 = $500 (for 6 months)
Principal = $10,000
Total return = $10,500 (for 6 months)
Yield = 5% (absolute yield for 6 months)
During the life of the product, the observed knockout price of the asset never exceeds the knockout price on each knockout observation day, a knock-in event occurs, and the final settlement price exceeds the put strike price. In this scenario, the product runs until maturity, and investors receive the principal and interest for the entire term of the product.
Investor's return:
Coupon income = $10,000*10%*6/12 = $500 (for 6 months)
Principal = $10,000
Total return = $10,500 (for 6 months)
Yield = 5% (absolute yield for 6 months)
This is the only scenario in which a loss could occur, but a specially agreed upon return may cover the loss from the delivery of the spot.
During the life of the product, the price of the underlying asset on each knockout observation day never exceeds the knockout price, and the final settlement price is below the put strike price. In this scenario, investors receive coupon income but bear a partial loss of the principal. In the schematic below, the BTC price is lower than the knockout price on each knockout observation day during the term. At maturity in the sixth month, investors receive the coupon payment but also bear the loss of the underlying asset relative to the put strike price.
Investor's return (assuming the underlying asset loses 30%):
Coupon income = $10,000*10%6/12 = $500 (for 6 months)
Remaining principal = $10,000/80%(1-30%) = $8,750
Total return = $9,250 (for 6 months)
Yield = -7.5% (absolute yield for 6 months)
