CMFAS M9A Structured Products question: linked derivative expires worthless

CMFAS M9AStructured Products

To boost upside, an issuer designs a note that returns only 75% of principal at maturity — cutting the fixed-income allocation by 25% to buy more derivatives. A client puts in S$20,000, but the linked derivative expires worthless. What does the client get back?

A S$20,000 — capital is always fully protected
B S$15,000, incurring a S$5,000 loss
C S$5,000, incurring a S$15,000 loss
D Nothing, because the derivative expired worthless

Show the answer and explanation

Answer: B. S$15,000, incurring a S$5,000 loss

Reducing safety to gain upside means only 75% of principal is protected: 0.75 × S$20,000 = S$15,000, a S$5,000 (25%) loss. There is still downside protection, but not for 100% of principal. This illustrates the trade-off — a smaller fixed-income leg funds greater upside participation at the cost of partial capital exposure.

Common mistake

A 75%-protected note is not fully protected; the worthless derivative leg means the investor loses the unprotected 25%.

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Related CMFAS M9A questions

David invests in a USD-denominated structured deposit that returns his USD 20,000 principal in full at maturity. At purchase USD/SGD was 1.40; at maturity it is 1.30. Ignoring any investment return, what is the effect when he converts the principal back to SGD?A credit-linked note is a funded credit derivative structured as a security with an embedded credit default swap. Its distinctive feature is that Requiring a counterparty to post collateral is a common way to manage counterparty risk. Which statement is correct?

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