Daily accrual feature gives you the opportunity to receive a potential distribution amount which is determined by the daily price movements of the reference stock.
For ordinary bull ELIs, the potential distribution amount, if any, is determined only on the final valuation date. However, the potential distribution amount of a bull ELI with a daily accrual feature will be determined by the number of exchange business days on which the closing price of the reference stock is at or above the coupon accrual price within a calculation period.
It is possible that you will not receive any potential distribution amount for the entire investment period.
If a bull ELI is linked to a basket of stocks, the potential distribution amount on a particular exchange business day during the calculation period will be determined by:
- which linked stock has become the reference stock (ie, the worst-performing stock) on that day; and
- whether its closing price is at or above its coupon accrual price.
Before we explain the calculation of the distribution amount of a bull ELI with a daily accrual feature, let us introduce the following common terms:
Total number of days is the total number of exchange business days during the calculation period.
Calculation period can be set as each exchange business day or certain periodic dates (e.g. monthly, quarterly) during the investment period.
Coupon rate is predefined by the issuer and is used to determine the potential distribution amount for each calculation period (e.g. 4% of the nominal amount).
Accrued days is the total number of exchange business days on which the closing price of the reference stock is at or above its coupon accrual price within the relevant calculation period.
Coupon accrual price of the reference stock is predefined by the issuer and is set at a specified percentage of its initial spot price (e.g. 70% of the initial spot price). It is the benchmark for determining whether the coupon amount will be accrued on a particular exchange business day.
Mode of settlement (in case the final price is below the strike price): Physical delivery
Final valuation date: Is Stock B's final price AT or ABOVE the strike price of $40?
If Stock B's final price is AT or ABOVE the strike price of $40:
You will receive the nominal amount of $30,000 in cash
If Stock B's final price is BELOW the strike price of $40 (Assume its final price of is $35):
You will receive Stock B:
(Nominal amount / Strike price) = $30,000 / $40 = 750 shares
Based on the final price, the market value of your shares will be worth less than your original investment,
representing a paper loss of:
$30,000 - ($35 x 750 shares) = $3,750
Depending on the accrued days, the potential distribution amount will be:
Please note that the examples and figures used in this section are purely hypothetical and are for illustrative purposes only.