Citigroup has used over-the-counter equity options to structure a five-year preference share investment, called the Extra Income Plan. The product, which is referenced to the FTSE 100, gives investors two options, one of which offers buyers either 8% annual income, 1.93% quarterly income or 43% growth after five years and the second gives them either 6.25% annual income, 1.5% quarterly income or 33% growth after five years, according to Daniel McNeill, structurer in the equity derivatives group at Citigroup in London.
These returns are generated by buying bonds issued by AA rated financial institutions and selling equity puts on the FTSE 100 with a knock-in at 60% of the level of the index, McNeill explained.
If the index does not fall by more than 40% from its initial value, the investors' capital is protected. If the index falls by more than 40%, however, in option one the capital repayment will be reduced by 2% for every 1% fall in the FTSE 100, he added. In option two, the repayment will be reduced by 1% for every 1% fall in the index from the starting value. This is because the equity put uses two-times gearing, whereas in the second option, there is no gearing. The product is aimed at retail investors in the U.K. through independent financial advisors organized by Keydata Investment Services, McNeill said.
