Using Derivatives for Enhanced Yield
In recent years, a relatively low interest rate environment has encouraged savers and investors to examine alternative investment products in search of more attractive returns than are generally available from fixed-term interest-bearing deposits.
This has prompted the banking community to work towards the introduction of a wide range of structured products, whose returns are dependent not on simple interest rates, but on the performance of an underlying-market, such as a stock market index, or a commodity price.
The wide range of derivatives now traded in the financial markets has proved ideal for building the foundations of many of these products. Indeed it is often possible to create a structure whose return can be enhanced whichever way the underlying market moves.
Investors can now choose from deposits whose returns depend on:
- The rise in an individual stock or equity.
- The rise in a market index, such as the Dow or the Nikkei.
- The movement in an exchange rate.
- The price of a commodity such as precious or base metals.
Investment structures can even be created that are 'market-neutral', where it is possible to create conditions in which a return can be obtained even if there is little or no movement in the underlying market. Examples of some of the more unusual offerings might include returns based on an exchange rate staying within a pre-agreed range or a stock market index neither rising nor falling by more than ten per cent. These are often referred to as 'path dependent structures, as the final return from the investment depends mainly on an underlying market performance.
Most of these investments are created using various derivatives, although the customer has no risk exposure to the derivative itself. This is borne by the bank. In each case, the depositor's initial capital will be returned in full, whatever the resulting payout.
Many of the structured deposits illustrated here are derived from 'Digital' (also known as 'Binary') options where a pre-agreed multiple of the initial premium is payable if the pre-determined market conditions are achieved.FX Touch Deposit
FX Range/ Double No Touch Deposit
FX Tower Deposit
Dual Currency Investment ('DCI')
Range Accrual Deposit
Capital-Protected Equity Linked Deposit
Target Redemption Note ('TARN')
At Emirates NBD Bank, it is our constant effort to meet all the requirements of Emirati efficiently by offering various banking services.