[Structured Product] Callable ELI

The comparison of Callable ELI vs. actual stock purchase illustrates that:

1. Return from Callable ELI is obtained by periodic distribution rather than difference between nominal value and purchase price as in traditional ELI.
2. The actual return from Callable ELI would vary - it depends whether the ELI would be called at Call Date if the closing price is greater than the Call Strike Price. The return should lie in the region between the best case (max distibution) and worst case (min distribution).

Calculation e.g. Macquarie Callable ELI Term Sheet dated Nov 23, 2005
Series Number                   58360 (731 Days)
Issue Date                      28-Nov-05
Minimum Application Amount
- HK $100,000 per Single Stock Callable ELI and thereafter
  in increments of 100,00
Fixing Date (Maturity Date)     27-Nov-07
Settlement Date (Payment Date)  29-Nov-07
Settlement Currency             HKD
Distribution Strike Price       5%
Reference Rate                  2.00%
=====================================================================
Share         SEHK    Board Call   Call  Reference Max       Purchase
              Code    Lot   Strike Value Price %   Potential Price %
                            %      %               Return
                                                   % PA
------------- ------- ----- ------ ----- --------- --------- --------
HSBC HOLDINGS 0005.HK 400   100%   100%  96.50%    8.00%     100.00%
=====================================================================
Distribution Call Date /    Distribution Distribution Distribution
Period       Distribution   Period       Period       Rate
             Valuation Date Start Date   End Date
                            (Inclusive)  (Inclusive)
------------ -------------- ------------ ------------ ------------
1            27/02/06       28/11/05     27/02/06     2.00%
2            26/05/06       28/02/06     26/05/06     X%
3            28/08/06       29/05/06     28/08/06     X%
4            28/11/06       29/08/06     28/11/06     X%
5            27/02/07       29/11/06     27/02/07     X%
6            25/05/07       28/02/07     25/05/07     X%
7            27/08/07       28/05/07     27/08/07     X%
8            27/11/07       28/08/07     27/11/07     X%
=====================================================================
X% = Reference Rate % x (Days In / Total Days)

HSBC's latest price = 125.50 (as of 2005/11/23 14:15)
If Nominal Value (Target Amount) = 200,000
Then
Part I – Traditional ELI performance
Purchase Price (Purchase Amount)
= Nominal Value x Purchase Price %
= 200,000 x 100.00%
= 200,000
Maximum Gain (Max Return Earning)
= Nominal Value - Purchase Price
= 200,000 - 200,000
= 0
Reference Price (Strike Price)
= Closing Price x Reference Price %
= 125.50 x 96.50% #Use latest price as expected closing price
= 121.108
Max. no. of shares (Receivable shares)
= Nominal Value / Reference Price
= 200,000 / 121.108
= 1,651.42
Break Even Price
= Purchase Price / Max. no. of shares
= 200,000 / 1651.42
= 121.108 i.e. Reference Price since Maximum Gain = 0
Part II – Distribution Performance
Min. Total Distribution Rate
= Distribution Rate for 1st period
= 2.00%
Best scenario per distribution period
i. Reference Price <= Daily Closing Price i.e. 121.108 (inclusive) to 125.000 (exclusive)
ii. Days In = Total Days
iii. Daily Closing Price < Call Strike Price (on Call Date)
Max. Distribution Rate per period
= 2.00%
Max. Total Distribution Rate
= No. of periods x Max. Distribution Rate per period
= 8 x 2.00%
= 16.00%
Maximum Gain (Max Return Earning)
= Nominal Value x Max. Total Distribution Rate
= 200,000 x 16.00%
= 32,000
Part I and Part II
Total Max. Gain
= Maximum Gain (Part I) + Maximum Gain (Part II)
= 0 + 32,000
= 32,000
Potential Return (Equivalent Interest)
= (Total Max. Gain / Purchase Price) x (365 / Duration in Days)
= (32,000 / 200,000) x (365 / 731)
= 8.00%
If buying stock directly at Purchase Price (Purchase Amount),
Then
No. of shares
= Purchase Price / Closing Price
= 200,000 / 125.50
= 1,593.625 #Assume odd lots can be purchased
Target Price for same earning
= Closing Price + (Total Maximum Gain / No. of shares)
= 125.50 + (32,000 / 1,593.625)
= 145.580 #Assume no dividend has been paid out
Max Deficit beyond Reference Price
= (Reference Price - Closing Price) x No. of shares - Maximum Gain
= (121.108 - 125.50) x 1,593.625 - 32,000
= -38,999.20

Reference
Macquarie Callable ELI