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Market Linked Debentures

Market Linked Debentures. Market linked Debentures. Market linked debentures combine the feature of passive fixed income and active equity returns.

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Market Linked Debentures

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  1. Market Linked Debentures

  2. Market linked Debentures • Market linked debentures combine the feature of passive fixed income and active equity returns. • MLD is a zero coupon bond, whose principal re-payment at maturity fulfills the capital guarantee, with the initial discount to par used to fund the debenture’s payoff profile.

  3. Determinant of MLDs Price • Equity Spot Level: • The most important determinant of option’s price. Payoff of the MLD is directly linked to the spot price • Interest Rate Level: • Interest rates affect the price of both options and bonds • Higher the interest rates, larger the initial discount is to par and more will be the participation in upside • Dividend Yield: • High dividend yield will pull down the forward, making the call cheaper, and increasing the participation in upside • Volatility: • Volatility is a key driver of option pricing. Higher the volatility, more expensive will be the call option and lower would be the participation. • Volatility Skew: • Volatility Skew is the variation of implied volatilities with respect to the strike price of the option. • Out of money options are quoted with the implied volatility smaller than those of at-the-money options and the opposite is true for options with strike smaller than the spot price

  4. Possible Payoff of MLDs Call Option 1:1 participation in the upside Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the start date of the option S[T]: Closing price of the stock on the expiry date of the option PF: Participation on the upside Payoff: PF * Max(100%,S[T]/S[0])

  5. Possible Payoff of MLDs Asian Call Option Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the start date of the option S[T]: Average of closing stock price on annual observation dates PF: Participation on the upside Payoff: PF * Max(100%,S[T]/S[0])

  6. Possible Payoff of MLDs Digital Option Tenor(T): 3 years Capital Protection: 100% S[0]: Closing price of the stock on the start date of the option S[T]: Average of closing stock price on annual observation dates PF: Participation on the upside Payoff: PF * Max(100%,S[T]/S[0])

  7. Volatility- Citibank Short/Long Exposure • Products • F&O Market • Perspective: Employee/Employer for ESOPs • Perspective: Employee/Employer for Market Linked Debenture

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