CMFAS CM-SIP Structured Products & Structured Notes question: reverse convertible paying a high coupon and linked to a single share

CMFAS CM-SIPStructured Products & Structured Notes

Nadia buys a reverse convertible paying a high coupon and linked to a single share. At maturity the share has fallen well below the strike. The MOST likely outcome is that Nadia:

A receives her full principal in cash plus the coupon, because the high coupon funds a full capital floor
B bears the fall in the share (via shares or a cash shortfall) but keeps the coupon, as if she wrote a put
C can require the issuer to buy the note back at par, because the strike was breached
D is reimbursed by the deposit-insurance scheme for any shortfall below the strike price

Show the answer and explanation

Answer: B. bears the fall in the share (via shares or a cash shortfall) but keeps the coupon, as if she wrote a put

Reverse convertibles are capital-at-risk yield-enhancement products; the high coupon compensates for downside risk, and if the underlying falls the investor bears the loss as though they had written a put on the stock.

Common mistake

Reading the high coupon as evidence of capital protection.

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Two notes reference the SAME index over the SAME tenor from the SAME issuer. Note P is 100% capital-protected; Note Q pays a much higher coupon and is capital-at-risk. Which inference is MOST accurate?David bought a 5-year 100% capital-protected note but needs his cash after 18 months. Which statement is MOST accurate?Wei Ling holds a 100% capital-protected note to maturity, but the ISSUER becomes insolvent; the underlying finished roughly flat. What does the capital 'protection' actually entitle her to?

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Original study material mapped to the public CMFAS CM-SIP syllabus. Unofficial, not endorsed by MAS or IBF. Verify figures and rules against current guidance before relying on them.