KBC Asset Management in Belgium has purchased barrier options in order to structure an investment product based on a basket of four equity indices. The product, dubbed Exclusive Profit Lock, gives 100% exposure to the Standard & Poor's 500, the Dow Jones EURO STOXX 50, the FTSE100 and the Nikkei 225, explained Lode Roose, product development manager in Brussels.
In order to create the structure, KBC purchased barrier options on the upside of each index with barriers set at 120% of initial value, 150%, 175% and 200%. Roose declined to name counterparties.
The payout is based on the performance of the indices on a predetermined "observation day" each month. If the indices are above one of the barriers on that particular observation day, the appreciation is locked in. For example, if the Nikkei has appreciates by 130% in January, the Nikkei's performance is locked in for the product's seven-year tenor at the 120% barrier, unless the index appreciates through one of the higher barriers on a subsequent observation day. The Exclusive Profit Lock is not capital guaranteed, and is largely targeted at private banking clients, said Roose.
