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Our investment products can provide both individual and institutional investors with flexible investment vehicles, which can accommodate varying appetites for risk, asset exposure and capital protection.

It is important that you understand the risks attached to each of the investments. The key risk areas are summarised below, but please remember that these are general risks and those relevant to a particular product are set out in the product literature.

Meteor does not provide financial advice or guidance on tax issues and we recommend that you talk to a financial adviser if you are considering investing. Some products require you to seek professional financial advice. Such products will be highlighted on the website and in the brochure.

Any investment should only form part of your total investment portfolio. You should also maintain savings you can access immediately and without penalty to meet any emergency cash needs that may arise during the investment term.

Availability and Residence – due to local regulatory and legal requirements, not all products described on this website are available in all jurisdictions and some may be available on a limited basis only.

The securities mentioned on this website are not being offered, and will not be sold, within the United States or to, or for the account or benefit of, any U.S. person. The term U.S. person shall have the meaning as defined in Regulation S under the United States Securities Act of 1933 and includes, among other things, U.S. residents and U.S. corporations and partnerships.

Cancellation Risk – the risk that if you decide to cancel the investment after assets have been purchased you could lose some of your money if the market(s) or asset(s) to which your contract is linked have fallen since the purchase date.

Counterparty Risk   – the risk that a financial institution with whom we arrange the assets to provide investment returns does not, or cannot, pay the amounts due, which could cause you to lose some or all of your money and any investment returns that would have otherwise been payable.

Early Encashment Risk – the risk that if you decide to encash the investment before maturity you could get less back than you invested. Administration charges for early encashment will increase any losses.

Inflation Risk – the risk that inflation will reduce the real value of your investment over time.

Investment Risk – The risk that the market(s) or asset(s) to which your investment is linked fall in value, which could cause you to lose money.

ISA Transfer Risk – if you wish to transfer an existing ISA this must be done in cash, which means your existing ISA manager will sell your investments and you may be charged an exit or transfer fee. There is the potential for loss of income or growth if markets should rise while your transfer remains pending.

Liquidity Risk – the risk that you may not be able to immediately access the value of your investment.

Pricing Risk – the risk that a financial institution with whom underlying investments have been arranged may not be able to quote regular prices making it difficult to value your investment and delaying any early encashment request you may make.

Product Risk – the risk that the product design could produce a return that is lower than a direct investment in the market(s) or asset(s) to which the product is linked.

Tax Risk – The values of any tax reliefs will depend on your individual circumstances. You should note that the levels and bases of taxation could change in the future and these changes may be applied retrospectively.

It is important that you read any product literature carefully and in full so that you understand how the product works and can decide whether or not you are prepared to accept the risks and the possible consequences of investing in a particular contract, before proceeding with an investment.

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Resources

Factors that affect pricing

In constructing pertinent investment solutions, we have to consider a number of factors. Most notably, it’s important to know which specific financial instruments generate the features and returns with the ability to recognise what drives their value

The following is an excerpt from our Education page. Click here to go to the Education page and learn more about structured products.

In constructing pertinent investment solutions, we have to consider a number of factors. Most notably, it’s important to know which specific financial instruments generate the features and returns with the ability to recognise what drives their value.

This section covers some extra bits that are good to know when considering structured products. More specifically, we go into more detail about how we balance risk and return given the available resources. This isn’t needed if all you’re after is a basic understanding of how structured product features work. This is for advanced users who are interested in the underlying market factors that affect the value of structured products at any point in time.

Factors that affect pricing

Drilling down to the fundamental barebones of equity-linked structured products, we find that most are composed of bonds and derivatives called options. Bonds provide the capital return aspect and derivatives provide the enhancement in investment returns. The price of these components will rise or fall depending on changes in market conditions and how it affects future expectations. When these components are cheaper, structured product manufacturers are able to buy more of them and can, therefore, offer higher rates of return.

Bond pricing

Bonds are the easier ones to tackle. As a basic example, a fixed rate bond that pays £5 every year for 5 years can be roughly approximated if the issuer promises to pay the investor £100 in 5 years if the investor gives them £75 today. In both cases, the investor receives £25. The latter, however, is an example of a “zero coupon bond”.

A zero coupon bond is, as the name suggests, a bond that pays zero coupon. Instead, they are sold at a discount and grow to “par” (or their terminal value), at the bond’s maturity date.

This is important because structured product investors pay £100 for every £100 worth of product – so if £75 of invested capital can be put into zero coupon bonds, the remaining £25 can go into financial derivatives to create the rest of the strategy. As you can imagine then, the higher the rate on these bonds, the more that can be spent on generating investment returns from derivatives.

The rate offered is dependent on how much the bond issuer is willing to pay and how willing investors are to lend to the issuer. Naturally, the higher the credit rating of an institution, the more likely an investor can expect to get their money back safely so they should be more willing to trust the issuer with their money. Issuers with higher credit risks then, have to offer more on their bonds to entice investors to part with their cash. This is why structured products that offer higher potential returns, generally entail higher credit risks (all other things being equal).

Option pricing

Options contracts give the holder the right but not the obligation to buy or sell an underlying asset at a predefined time in the future at a predefined price.

If we consider the FTSE 100 index, for example, we might purchase the option to buy a unit of the FTSE 100 for 6500 (the strike price) in 5 years (time to maturity)*. If the FTSE 100 rises to 7000, we will profit because we have the option to buy it at 6500 and sell it in the open market for 7000. Alternatively, if the FTSE 100 falls to 6000, there would be no reason to exercise the option and so we’d lose whatever we paid for the option.

The price of options is important to us because they dictate the return we can offer in structured products. Effectively, it all comes down to the likelihood of an option producing a profit. Here is lowdown of pricing factors, following on from the FTSE 100 example above:

Strike price of the option

In the above example, the “strike” price is 6500. We would expect an option with a 6400 strike price to be more expensive than the 6500 one because it is a lower hurdle (easier to make a profit).

Underlying level

In the above example, the option will get more expensive as the level of the FTSE 100 rises because it is more likely to end up above 6500.

Dividend yield of the underlying

The price of shares typically falls by the amount of any cash dividend on the ex-dividend date. As dividend expectations increase then, the price of the option in this example will fall because the likelihood of the FTSE 100 finishing above 6500 will also fall.

Volatility of the underlying

Volatility describes the degree to which a price moves up or down. So regardless of whether you have an option to buy or sell, as volatility expectations increase, option prices will also increase because the likelihood of options ending in profit also increases.

Time to maturity of the option

The longer the time to maturity, the more opportunities the underlying has of ending above 6500. In the example above, therefore, we’d expect a 6-year option to be more expensive than a 5-year option.

*Note that this refers to a “call” option. The right but not the obligation to sell a unit of the FTSE 100 is called a “put” option.


Posted: 24 November 2020
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