Hello
In the previous three lessons, we learned the basic principles of FCN and how to estimate its returns. Now, how should we actually go about obtaining quotes and executing trades? Today, we will guide you through the practical steps using the Tiger Brokers app.
Firstly, open the market interface for FCN.
1. How to Navigate the FCN Interface?
On the app's market interface, swipe left at the top to find "Notes" and click to enter. Now, you are directly on the recommended page for FCN. Let's take the example of the popular product from the recommended products. Combining the basic knowledge from the previous three lessons, apart from the term and minimum investment, the parameters for this product are as follows:
Source: Tiger Trade platform for illustrative purposes only. It should not be treated as investment advice.
1. The coupon Rate is 12%.
This means the monthly interest rate is 1%, and investors can receive 3% interest if the investment successfully reaches the end without being knocked out prematurely.
2. The strike Price Ratio is 74.25%.
This indicates that the target price for receiving the stock is 74.25% of the initial price. For example, if the initial price is $100, the stock may be received if the price drops to $74.25.
When we click on this product and go to the details page, there are also parameters to pay extra attention to: the Knock-Out type and Knock-Out Frequency.
Source: Tiger Trade platform for illustrative purposes only. It should not be treated as investment advice.
1.Knock-Out type
The Knock-Out type refers to the frequency at which the determination for triggering a knock-out is made. There are mainly two methods: Period End and Daily Observation.
If it is Period End, the last day of each month is the observation day, and the knock-out will only occur if it is triggered on the observation day. If it is Daily Observation, then on any trading day, if the knock-out price is reached, it will trigger a knock-out. As this product has a one-month protection period, whether it's Period End or Daily Observation, the actual observation begins one month later.
It's important to note that if it is Daily Observation, for example, if a knock-out is triggered on the 10th of the second month, the interest for the second month will be calculated until the 10th.
Source: Tiger Trade platform for illustrative purposes only. It should not be treated as investment advice.
2.Knock-Out Frequency
The number following the Knock-Out Observation Frequency indicates a one-month protection period. This means that within one month, regardless of Period End or Daily Observation, no knock-out or knock-in will occur.
Finally, it's worth noting that the FCN products available on the Tiger Brokers app involving knock-ins are observed at the end of the last month. Therefore, there won't be any strike of knock-ins in the middle. Even if a knock-in is triggered, investors can still receive the entire interest.
2. How to Inquire?
After understanding the basic parameters, we can click on the "Get Quote" button, enter the inquiry page. We can use either the "Strike Price Ratio" or the "Coupon Rate" as the output result. How should we operate with each of these parameters?
1.Strike Price Ratio
Suppose the investor, Jack, wants to buy this FCN product. Jack values a higher coupon rate, so his investment preference is to set the expected annualized coupon rate of FCN to around 12%, with a term of 3 months. To minimize the chances of being knocked out, Jack chooses a knock-out price at around 120% (higher knock-out price implies lower probability of being knocked out). Then, in the advanced settings, he selects the "Period End" knock-out method.
Source: Tiger Trade platform for illustrative purposes only. It should not be treated as investment advice.
Afterward, clicking on "Get Quote," you can see that the optimal strike price quote ratio for this product is 77.76%. This means that if the stock price is less than or equal to 77.76% of the initial price on the Period End observation day, Jack will have to accept the stock at that price.
Source: Tiger Trade platform for illustrative purposes only. It should not be treated as investment advice.
It's worth noting that as you increase the coupon rate and knock-out ratio, the subsequent strike price quoting ratio will also rise. For instance, if Jack adjusts the interest rate requirement to 13%, the quoting ratio for the strike price becomes 79.08%. For Jack, this means a higher likelihood of executing the stock. Whether this is a risk or an opportunity depends on individual perspectives. Many FCN investors prefer not to execute the stock, aiming instead to receive the principal and interest for a stable return. On the other hand, there are also those who use FCN with the expectation of executing the stock at a specific price. If the strike price ratio is too low, the likelihood of executing the stock is minimal, which may not necessarily be a positive outcome.
Source: Tiger Trade platform for illustrative purposes only. It should not be treated as investment advice.
2.Coupon Rate
Continuing with the previous example, if Jack's investment goal is to smoothly hold the FCN until maturity and receive both the principal and interest, without hoping for a knock-out or strike, he can choose to inquire with the interest rate as the parameter. In this case, Jack can set the strike price ratio and knock-out price ratio according to his preference.
Assuming Jack anticipates that the stock price will fluctuate within a ±30% range over the next three months, he can choose an strike price ratio of 70% and a knock-out price ratio of 130%.
Source: Tiger Trade platform for illustrative purposes only. It should not be treated as investment advice.
After inquiring, he found that the optimal quoted interest rate is 7.31%. This means that if Jack successfully holds the FCN until maturity, he will receive an interest rate of 1.83% （7.31%/4） per month.
Source: Tiger Trade platform for illustrative purposes only. It should not be treated as investment advice.
Of course, since all FCN products listed on the Tiger Brokers app have a one-month interest protection period, regardless of which inquiry method Jack chooses, at least the first month will not trigger a knock-out or strike for stocks.
Alright, the above is the process of practically inquiring about FCN products using the Tiger Brokers app. If anyone has any questions about the above process, feel free to leave a comment in the discussion section, and I'll be happy to answer!
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.
Comments
Eir