The Pinnacle Notes has a "credit event". If any of 5 entities default, the investor has the chance to lose up to 40% of the invested amount.
What is the likelihood of this happening? I checked the internet for "credit defaults".
I found a link to "credit default swaps" or CDS. It appears to me that the Pinnacle Notes have CDS built into the product.
I find it quite complex to understand the CDS, especially to calculate the chance of a "credit event" occuring.
You should read the section on "Criticism". It quotes Warren Buffet.
Lesson: If you are not able to understand a product, do not invest in it. You do not know if you are getting a fair deal.
The swap is to insure its credit exposure. Therefore in the event of a default, the loss is mitigated. It is like buying future or option to hedge against a downside risk. The fund managers use plenty of these derivatives. If you look at Income's funds quite a substantial amount is spent annually on theses derivatives.
ReplyDeleteTherefore it is no surprise that synthetic fixed income like Minibond uses too.
I am not familiar with the MiniBond.
ReplyDeleteBut, I know that some structured products invest in credit default swaps to enhance their yields. They sell the swaps (to take the risk, i.e. like selling insurance). In the event of a credit event, the sellers of the swap (ie the investors in the structured products) can suffer a big loss.
This is why the investors in the structured products are warned that you may lose part or all of your investments.
Is the risk small? I do not know.
Lesson: Do not invest in any product where the risks are not clear!
They are taking a big risk
I think it is to understand whether you'd like to bear the risk when invested.
ReplyDelete