Hello, friend!
Welcome to the 《FCN Investment Course》，This course is divided into four sections. In the first section, we will provide an introduction to the basic concepts of FCN, helping you understand its fundamental principles and advantages.
The second section will compare FCN with other financial products, giving you a clearer understanding of the suitability of each type of financial product.
The third section will use case studies to calculate the risks and returns of FCN, providing you with a clearer understanding of the product's risk and return, and facilitating a transition from entry-level to advanced knowledge.
In the fourth section, we mainly teach you how to trade FCN products on Tiger APP.
Let's start with the basic concepts of FCN.
1.What is FCN?
The exact nature of Fixed coupon notes (FCN) is often debated – some say it's a bond, others say it's a stock, and some classify it as a structured derivative. Today, we'll clarify it by using an example.
Suppose the price of symbol stock is $100, and Jack wants to buy it when the price drops to $80. However, Jack's funds don't generate value while waiting for the stock to drop. If he invests in a current financial product, the returns are too low. So, Jack enters into a contract: he earns interest during the waiting period before symbol drops to $80. If the stock price reaches $80, Jack can use the funds to buy the stock. If the stock price rises instead, reaching $120, the contract terminates, and Jack still receives interest during this period. This contract is called an FCN, and the fixed interest earned is the fixed coupon of the FCN. Jack's target purchase price of $80 is the exercise (strike) price, and $120 is the knock-out price that leads to the termination of the contract.
Understanding the above example, let's delve into the specific definition of FCN.
FCN stands for Fixed Coupon Notes, also known as fixed-rate notes. FCN is a type of structured financial derivative that combines the characteristics of bonds (providing regular interest payments, usually at higher rates than typical fixed-income products) and the flexibility of stocks (linked to one or more stocks). It can be converted into stocks under specific conditions.
A standardized FCN product typically includes the following parameters: underlying asset(s), investment term, interest rate, exercise (strike) price & knock-out price.
For instance, if an FCN has a term of six months, an annualized coupon rate of 12% (1% per month), with monthly observation days at month-end, and it is linked to symbol stock with a strike price of $80 and a knock-out price of $120.
In general, investors will face three scenarios:
Holding until maturity:
The investor holds the FCN until maturity without knock-outing or exercise. They receive fixed interest payments, and at maturity, they get back the principal plus accumulated interest.
Early termination due to knock-out conditions :
If the knock-out condition is met (e.g., symbol stock price surpasses the knock-out price of $120), the contract terminates early. The investor receives interest payments and the principal. The early termination may be beneficial or unfavorable depending on market conditions.
Exercise due to favorable conditions:
If the stock price drops to the exercise price of $80, the investor may exercise the FCN and use the funds to purchase the underlying stock at the agreed-upon price. This allows the investor to benefit from a favorable stock price.
In summary, FCN is a versatile financial instrument that combines elements of bonds and stocks, providing investors with opportunities for fixed income while maintaining flexibility in stock market participation.
Scenario 1: Hold Until Maturity | Scenario 2: Early Redemption | Scenario 3: Worst Case |
1. In each subsequent observation day, as long as symbol's stock price remains between $80 and $120, without knock-outing exercise or termination, the investor can smoothly earn a monthly interest of 1%. | 2. If, on an observation day, the stock price exceeds $120, knock-outing an early termination, the FCN concludes, and the investor receives the principal along with the interest earned during the holding period. | 3. If, on the last observation day, the stock price falls below $80, knock-outing exercise, the investor needs to buy the stock at $80 and receives both the stock and the interest earned during the holding period. |
2.Advantages of FCN
Now that you have a clear understanding of what FCN is, let's summarize its advantages:
Discounted Purchase of Stocks:
If the underlying asset's price rises during the investment period and meets specific conditions, investors can receive interest income for the holding period and cash in profits early. However, if the underlying asset's price is below the exercise price at the end of the period, investors may effectively purchase the underlying asset at a price lower than the current market price while still enjoying interest income. This effect can be seen as establishing a position in the underlying asset at a discounted price.
Earn Stable Income:
In a volatile market, as long as there is no exercise (strike) or early termination, FCN may provide relatively stable interest income, suitable for investors seeking predictable interest returns, regardless of how the underlying asset fluctuates.
Short Contract Period, Quick Liquidation:
The contract period of FCN is generally 1-6 months, with observation days each month for knock-out observations. If a knock-out occurs, the contract can be terminated early, allowing investors to realize interest income. Exercise observations typically occur at the end of the term, observing whether the exercise will be executed on the last observation day.
Underlying Assets of FCN
FCN can be linked to various underlying assets, including single or multiple stocks, stock indices, commodity futures, exchange rates, interest rates, and more. This diversity allows FCN to adapt to different investment needs and market expectations. The most common underlying assets are single stocks and multiple stocks.
The rules for exercise and knock-out for a single stock or an index are not overly complex. However, when linked to multiple stocks, the rules become slightly more intricate as they involve considering price movements and relationships between multiple underlying assets.
No worries, we will delve into these details in the next lesson.
Structured notes may involve financial derivatives and carry specific product risks. It is a non-principal protected product and is limited to professional investors only. Investors should carefully review product information and terms and conditions to understand product details and risk disclosures. Please be fully aware of the investment risk and market risk. This material is for investor education purposes only. It should not be treated as investment advice.