12 Case Studies

These cases are decision exercises, not product endorsements. A representative should establish suitability, knowledge, risk willingness, financial capacity, external exposure, internal limits, buffers, leverage, stop/offset discipline, profit targets and current market information before recommending a trade.

12.1 Enhanced yield with currency investments — Mrs Goh

Mrs Goh holds USD, GBP and SGD. She expects a short-term USD rebound but longer-term USD weakness and accepts conversion into SGD/GBP. A USD/SGD DCI invests USD1m for three months at 11% p.a., strike 1.3800, spot 1.3569.

• If expiry spot is 1.3300, no conversion at strike; USD proceeds = 1,000,000 + 1,000,000 × 11% × 3/12 = USD1,027,500. Converted at 1.33 = SGD1,366,575.
• If spot is 1.3800, proceeds remain USD1,027,500.
• If spot is 1.4100 and conversion applies, USD1,027,500 is converted at 1.3800 = SGD1,417,950.

From the bank’s perspective, fund the deposit at 1.3919% and sell the option at 0.0250, giving about USD1,028,566.74 after three months — annualised around 11.43–11.44%, above the 11% client return. DCI yield is option premium plus deposit interest and conversion risk.

The GBP/USD DCI example at 10% p.a., strike 1.3000 shows that if spot is 1.2800, the conversion calculation yields about USD1,009,230.76; if spot is 1.2600, proceeds about USD993,461.54 imply annualised return around −2.62%. A high headline yield does not prevent capital loss in the base currency.

12.2 Short-term downside volatility — Brian

Brian expects a two-month equity correction, higher volatility and longer-term recovery. Before trading, verify risk willingness/understanding, capacity and external positions, experience, internal limits, buffers, leverage, stop/offset plans, profit taking and market information. Limits, margin buffers and education help; maximising leverage does not.

Possible tools:

• long index/futures puts: limited premium loss, direct downside insurance, time decay and expiry risk;
• put warrants: similar limited-premium downside exposure, time decay/issuer risk;
• short index futures: direct daily-settled exposure, margin and potentially large losses if the market rises;
• short or long inverse/leveraged DLCs: daily reset and amplified risk;
• inverse ETFs/ETNs: exchange access but tracking, cost, roll and leverage risk;
• long volatility futures ETF: benefits from a volatility spike but suffers from leverage and contango/roll decay; long-term holding can trend toward zero.

Timing is difficult; short products are costly to maintain and should be closed/rolled with discipline.

12.3 Portfolio protection — William

William holds OCBC, DBS and CapitaLand worth SGD92.72m and wants protection beyond a 7% fall. Compare put-warrant strikes, breakeven, expiry and stock coverage. In the 7% scenario, DBS/OCBC put warrants B and D are in-the-money; CapitaLand E is selected because it is the only available CapitaLand protection and is less OTM than alternatives. A and D offer more time protection; E covers CapitaLand.

Higher volatility raises warrant prices because the strike is more likely to be reached. OTC alternatives are lending the shares for a 4–5% fee, buying tailored protective puts 3–4% below spot, or shorting MSCI Singapore futures. The futures hedge is imperfect because the three stocks represent only about 31% of the index. Futures have immediate daily MTM obligations; a long put has a right, not an obligation; a share loan earns a fee.

12.4 ELN yield and discounted blue-chip purchase — Mr Sunjoyo

OCBC spot = SGD13.30; ELN purchase = SGD975,000; notional = SGD1m; strike = SGD12.50; 80,000 shares; three months; annualised headline yield = 10.66%.

• At expiry SGD12.40, shares are worth SGD992,000; return over three months = 1.7435%; annualised compound return ≈7.16%.
• At SGD12.00, shares are worth SGD960,000; return = −1.5385% over three months; annualised ≈−6.29%.
• Breakeven = 975,000/80,000 = SGD12.1875 ≈ SGD12.19.

The client is effectively short a put: below the strike, he owns the falling stock and can lose up to almost the entire investment if the stock goes to zero.

12.5 Range accrual note — Robert

AUD/USD range = 0.7600–0.8200, maturity three months, maximum yield 6%, minimum 1%, MMR 2.75%. If inside for two months and outside for one, annualised payout is $6\% \times \tfrac{2}{3} + 1\% \times \tfrac{1}{3} = 4.33\%$ (the answer text displays approximately 4.32% due to rounding).

To make the digital spread cheaper or raise maximum yield: narrow the range, skew it so spot is nearer a barrier, extend maturity, or lower the minimum yield. Widening the range makes inside outcomes more likely and the option more expensive; shortening maturity can increase cost. A double-no-touch version observes the path: touching either barrier terminates the enhanced payout and leaves only the minimum return.

12.6 Equity accumulator — Harry

ABC spot SGD1.10; strike SGD1.00; knock-out SGD1.30; one year/250 business days; 10,000 shares per observation; monthly settlement. An accumulator combines long call and short put economics and can be funded or margin/unfunded. Below strike under a 1×2 arrangement, the client may have to buy 2×; above strike but below the knock-out, 1×; at/above the barrier, the note terminates.

• If the barrier is touched on day 13, days 1–12 accumulate: 120,000 shares.
• Twenty days in month 1 plus 12 days in month 2 before day-13 knock-out = 320,000 shares; cost = SGD320,000.
• If marked at SGD1.30, value = SGD416,000 and gain = SGD96,000.

Worst case: price zero for 250 days, 2.5m shares purchased at SGD1 = SGD2.5m loss. There is no capital preservation; the bank may margin-call/liquidate; gains are capped by the knock-out while losses continue below strike; early-break costs can be large.

12.7 Gold, silver and USD volatility — Brandon

Rising US rates may strengthen USD and weaken gold/silver, while political/equity uncertainty may support safe-haven gold. Gold’s widening premium to silver and different USD sensitivities create relative-value ideas. If the direction is uncertain but a large move is expected, buy a gold straddle: long call and long put at the same strike. A strangle uses different OTM strikes and is cheaper but needs a larger move. Combine a bull call spread with a bear put spread, or a bull call with a bear call, to express two-sided volatility; do not use two bearish or two bullish structures if the view is genuinely two-sided.

12.8 Yield-curve movement — Tracy

Tracy expects the US yield curve to flatten/invert: short rates rise faster than long rates. A constant maturity swap (CMS) resets a floating leg against a long-term constant-maturity rate; unlike a vanilla IRS, the reference maturity/duration remains constant. It can express steepening/flattening views. To benefit from short rates rising faster, swap the long end for the short end — pay the long-end rate and receive the short-end rate — subject to the exact swap convention and market quotation.

Exam cues

The case studies test the same method, not the products. For each, work the numbers and identify the embedded option and the investor’s obligation.

• DCI (Goh): yield = option premium + deposit interest; conversion risk is the real exposure. A high headline yield does not prevent a base-currency loss.
• Downside volatility (Brian): puts / put warrants cap loss at premium but decay; short futures and inverse/leveraged products add margin, daily reset and compounding risk.
• Portfolio protection (William): compare put-warrant strikes, breakeven and coverage; a futures hedge is imperfect when the basket is only part of the index; a long put is a right, a futures position is an obligation.
• ELN (Sunjoyo): effectively short a put — breakeven = purchase / shares; below strike the investor owns the falling stock and can lose almost everything.
• Range accrual (Robert): payout = max × (days inside / total) + min × (days outside / total); a double-no-touch observes the path and a barrier touch leaves only the minimum.
• Accumulator (Harry): 1× above strike to the knock-out, 2× below strike; gains capped by the knock-out while losses continue — worst case is multiples of the notional.
• Two-sided volatility (Brandon): a straddle/strangle for a large move; combine a bull call spread with a bear put spread — never two structures on the same side.
• CMS (Tracy): pay the long end and receive the short end to profit from short rates rising faster than long rates.

---

Practise this chapter →