I walked past a bank the other day and got a brochure of the above. Many of my friends actually asked me if it is worthwhile to invest in it. So I took a look at the brochure.
I do not know the exact situation but I can make a guess how the bank structured the product. This product :
1)gives customers 100% principal guaranteed if it was held to maturity or upon UOB early redemption;
2)pay interets of maximum 7% only if all shares is above the barrier level, which is 3% above initial price;
3)it is based on the performance of 5 stocks, and if any of the stock is below the barrier level, which is around 90-95% of the initial price, you get only 0.353%.
Now, you need to compare this with the situation if you buy the 5 stocks yourself. If this is the case, you will make or loss depending on the movement of the 5 stocks. However, since you are holding a portfolio of 5 stocks, you are diversified, and if any one stock tank, you can still come out a winner.However, in this product, the reverse is true. You just need any one stock to tank and you are out.
Than if all stocks are performing well, your maimum upside is 7%.
I reckon that the bank already have all these stocks in their book. So what they are doing is that they structured this product and sell to the customers. The customers put money into this product. What UOB is that they sell call options on the 5 stocks and pocket the premium. The deposit from the customer, they can placed it out as Fixed deposit and again pocket the interest. if the one of the stock fall and hit the barrier, at expiry, the customer will be strike out and received only minial interest while the bank pocket the premium and the fixed deposit interest.
If the 5 stock rally and all closed above teh barrier, the bank make money from the 5 stock they already hold. The bank still pocket the premium and the deposit interest, and at the same time, deliver the stock to the option buyer. The bank wins anyway.
So to me, it may not worth the while. Unfortunatley, retail customers cannot get access to option in Singapore stock and therefore is at teh mercy of the bank for such products.