Equity Linked Notes

Why Equity Linked Notes?

In simplified view, the classical banking business consists of two kinds of business:

The interest for saving is lower than the interest for credit and this difference (and some other provisions and fees) founds the profit of the bank. In addition to this classical business, which we may call money and credit trade, the banks have developed a new business in the last 20-30 years: risk trade. Under the risk we understand, the risk that the price for something will rise or fall in the future, and we don't know, which direction the price will take. The business follows the same pattern, as by savings and credits:

In the second group there is a problem for the bank: how can the bank be sure, that the willing-to-take-risk customer will pay his or hers gambling debts on the end? This problem, also known as counterparty risk is solved in three ways:

What exactly are Equity Linked Notes?

Equity linked notes usually are debt obligations of the issuer bank. Their main characteristics are:

If the closing price of the Daimler Stock (DE0007100000) on Xetra on October 31st is higher than 60 EUR, the holder of the note receives 60 EUR. Otherwise he or she recives the closing price of the stock.

On German market there are currently more than 400 000 different equity linked notes. A summary can be found on e.g. http://zertifikate.finanztreff.de/ (only in german).

Should one buy such things?

Yes and No! In each case, one should know what he or she is doing. The main things to consider are:

Equity Linked Notes from the issuer point of view

From the issuer point of view the equity linked notes are profitable buisiness for the following reasons:

Types of Equity Linked Notes

The most common types of equity linked notes are:

These three types will be discussed hier in the next couple of months.