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Derivatives: Invest in the PSEi without the risk of losing money?

mjtfernandez · 13 · 6482

mjtfernandez

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I just received news from head office (although not yet clear) that Insular Life is coming up with an investment linked to the PSEi but if held till maturity will insure there will be no capital loss.

Not really clear yet but this is how I understand it:

If client invests P1M today and index is now at around 5,900
If the index at maturity is 5,500 then the client will still get the P1M and is not exposed to the capital loss.

But if the PSEi goes up the investment goes up also.

So far this is what I have for you guys. Will update you from time to time.
« Last Edit: Jan 08, 2014, 11:17 PM by FutureGizmo »


mokongboy

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Boss chief, maturity period is after 20 years?! or after a lifetime?



yllor

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this would be related to sharia compliant investments, since recently PSE had some news about sharia compliant stocks?

well, let's wait for the conditions and mechanism.

it is still a mutual fund.
____________

Actually, I stumbled in this kind of investment with HSBC-Dubai. It was offered by bank relationship manager as he sees some extra fund sitting in my savings account.

I don't understand very well the mechanism but I venture because the initial investment is safe/guaranteed at the end of investment term of 3 years and a probability of earnings if the mutual fund performance is good. A sharia compliant investment.

So far, I had a hindsight and did not consider the effect of being an OFW.  The tenure of staying in Dubai is not fixed or defined. It depends entirely on your employment contract / residence visa.

2009 came, financial recession, and there you go with it.

At the end of 3 years, I recoup my initial investment at par value.

I did not earn for the opportunity in savings interest but I gain experience in investment.
_______


chinito77

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What is the sense of preserving your capital?? After 3 years the value is no longer the same..  :bahalaka:

Go for something riskier with better returns..  :watchuthink:


freefront

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...or, this is a one time pay VUL with a derivative product as its investment vehicle. I don't think they are going to risk for a bunch of Shariah stocks kasi hindi nila ma-back test at wala pang record( dahil katatapos lang ma-certify?)

Well, somebody in Insular went "mental" and they are riding on the very human "fear of loss" which according to the investment book I read again is 3X as powerful as the want for gain. Filipinos included, people would rather sit on their money to preserve the capital rather than risk it for a considerable gain. For which they fail to understand that they are losing both ways if they'd rather just sit on the money. That loss would be in the guise of inflation and opportunity loss.

Kabaliktaran sya nung issue ng BPI dati na "high water mark"? That product would have been nice to have last 2013, yeah?

Hmmnnnn....likely an insurance product. They are guaranteeing the return of your capital, but not on a 2% management fee of a mutual fund as a hedge. Ang laki ng risk ng issuing company. Capital will probably be tied up 5-7 years, with corresponding early withdrawal fees.

PD: I have on my head a 10K USD VUL from the other company( funds not mine) the investment product of which is a bunch of companies from the emerging markets, that has been back tested. Well, that went south because money shifted back to developed countries. Value now is about 9,200. So I'm guessing papatok yang "guaranteed return of capital" sa mga very conservative ang profile.



jmces

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he mentioned derivatives

A derivative is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the "underlying".[1][2] Derivatives are one of the three main categories of financial instruments, the other two being equities (i.e. stocks) and debt (i.e. bonds and mortgages). Derivatives include a variety of financial contracts, including futures, forwards, swaps, options, and variations of these such as caps, floors, collars, and credit default swaps. Most derivatives are marketed through over-the-counter (off-exchange) or through an exchange such as the Chicago Mercantile Exchange, while most insurance contracts have developed into a separate industry.- definition from wikipedia


there is no such thing as a risk free investment
« Last Edit: Jan 09, 2014, 09:20 AM by jmces »


ikaela

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^^That's what I thought, too, that this new Insular product is comparable to BPI-Philam's High high water mark. In order to preserve capital, this product has to be conservative. And minimum holding period is possibly 10 years. I know Sunlife has a similar product, something called Prosperity 10 or Abundance 20,  I forget the name now. They will supposedly place your money in aggressive investments in the first few years, and as maturity date nears, they're going to switch it to more conservative investments.


mjtfernandez

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Boss chief, maturity period is after 20 years?! or after a lifetime?



Hello guys, maturity period according to the info sent to me by Insular is 7 years.
There is an index locking every 6 months and the index value every 6 months will be recorded and will be averaged but if the index falls below the initial index value on the first strike date, the index to be used for recording will be the higher of the initial strike date index or the current index value whichever is higher.

The total index value will then be averaged (all 14 index observations will be totaled and divided by 14) and the index will be used to determine the value of the return to be computed after the 7 years to be given to the client as maturity value.

Really hard to describe but just think of this. If the market goes down the one used for getting the average price is the higher of the initial index value and the current market value. Total all the 14 observations and divide by 14 to get the average index value every six months and multiply by the participation rate, that is the return of the client.
« Last Edit: Jan 09, 2014, 03:49 PM by mjtfernandez »


jmces

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Hello guys, maturity period according to the info send to me by Insular is 7 years.
There is an index locking every 6 months and the index value every 6 months will (a total of 14 observations) will be averaged but if the index falls below the initial index value on the first strike date, the index to be used will be the higher of the initial strike date index or the current index value.

The total index value will then be averaged (all 14 index observations will be totaled and divided by 14) and the index will be used to determine the value of the return after the 7 years to be given to the client.

looks like it really is a derivative product, derivatives carry higher risk than stocks

Common derivative contract types[edit]
Some of the common variants of derivative contracts are as follows:
Forwards: A tailored contract between two parties, where payment takes place at a specific time in the future at today's pre-determined price.
Futures: are contracts to buy or sell an asset on or before a future date at a price specified today. A futures contract differs from a forward contract in that the futures contract is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold; the forward contract is a non-standardized contract written by the parties themselves.
Options are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. In the case of a European option, the owner has the right to require the sale to take place on (but not before) the maturity date; in the case of an American option, the owner can require the sale to take place at any time up to the maturity date. If the owner of the contract exercises this right, the counter-party has the obligation to carry out the transaction. Options are of two types: call option and put option. The buyer of a Call option has a right to buy a certain quantity of the underlying asset, at a specified price on or before a given date in the future, he however has no obligation whatsoever to carry out this right. Similarly, the buyer of a Put option has the right to sell a certain quantity of an underlying asset, at a specified price on or before a given date in the future, he however has no obligation whatsoever to carry out this right.
Binary options are contracts that provide the owner with an all-or-nothing profit profile.
Warrants: Apart from the commonly used short-dated options which have a maximum maturity period of 1 year, there exists certain long-dated options as well, known as Warrant (finance). These are generally traded over-the-counter.
Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies exchange rates, bonds/interest rates, commodities exchange, stocks or other assets. Another term which is commonly associated to Swap is Swaption which is basically an option on the forward Swap. Similar to a Call and Put option, a Swaption is of two kinds: a receiver Swaption and a payer Swaption. While on one hand, in case of a receiver Swaption there is an option wherein you can receive fixed and pay floating, a payer swaption on the other hand is an option to pay fixed and receive floating.
Swaps can basically be categorized into two types:
Interest rate swap: These basically necessitate swapping only interest associated cash flows in the same currency, between two parties.
Currency swap: In this kind of swapping, the cash flow between the two parties includes both principal and interest. Also, the money which is being swapped is in different currency for both parties.[27]-wikipedia
« Last Edit: Jan 09, 2014, 03:02 PM by jmces »


yllor

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What is the sense of preserving your capital?? After 3 years the value is no longer the same..  :bahalaka:

Go for something riskier with better returns..  :watchuthink:

who would know by then in year 2006 that in 2009 will have a financial recession anyway?

it is still good coz the capital was recouped at par rather than loss. i never mind the profit because almost every investment goes down in 2009 due to recession.

RISK?, well, it depends on the investment profile. I was new to investments by that time and conservative.
_________

7 years maturity for the investment product? interesting!
.... and interesting to compare against other investment products available.


mjtfernandez

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looks like it really is a derivative product, derivatives carry higher risk than stocks

Common derivative contract types[edit]
Some of the common variants of derivative contracts are as follows:
Forwards: A tailored contract between two parties, where payment takes place at a specific time in the future at today's pre-determined price.
Futures: are contracts to buy or sell an asset on or before a future date at a price specified today. A futures contract differs from a forward contract in that the futures contract is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold; the forward contract is a non-standardized contract written by the parties themselves.
Options are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. In the case of a European option, the owner has the right to require the sale to take place on (but not before) the maturity date; in the case of an American option, the owner can require the sale to take place at any time up to the maturity date. If the owner of the contract exercises this right, the counter-party has the obligation to carry out the transaction. Options are of two types: call option and put option. The buyer of a Call option has a right to buy a certain quantity of the underlying asset, at a specified price on or before a given date in the future, he however has no obligation whatsoever to carry out this right. Similarly, the buyer of a Put option has the right to sell a certain quantity of an underlying asset, at a specified price on or before a given date in the future, he however has no obligation whatsoever to carry out this right.
Binary options are contracts that provide the owner with an all-or-nothing profit profile.
Warrants: Apart from the commonly used short-dated options which have a maximum maturity period of 1 year, there exists certain long-dated options as well, known as Warrant (finance). These are generally traded over-the-counter.
Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies exchange rates, bonds/interest rates, commodities exchange, stocks or other assets. Another term which is commonly associated to Swap is Swaption which is basically an option on the forward Swap. Similar to a Call and Put option, a Swaption is of two kinds: a receiver Swaption and a payer Swaption. While on one hand, in case of a receiver Swaption there is an option wherein you can receive fixed and pay floating, a payer swaption on the other hand is an option to pay fixed and receive floating.
Swaps can basically be categorized into two types:
Interest rate swap: These basically necessitate swapping only interest associated cash flows in the same currency, between two parties.
Currency swap: In this kind of swapping, the cash flow between the two parties includes both principal and interest. Also, the money which is being swapped is in different currency for both parties.[27]-wikipedia

Yes sir this uses a derivative called a call option.


mjtfernandez

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who would know by then in year 2006 that in 2009 will have a financial recession anyway?

it is still good coz the capital was recouped at par rather than loss. i never mind the profit because almost every investment goes down in 2009 due to recession.

RISK?, well, it depends on the investment profile. I was new to investments by that time and conservative.
_________

7 years maturity for the investment product? interesting!
.... and interesting to compare against other investment products available.

I heard rumors that the index can go down to as low as 5,000 and below. But these are just rumors. But then again if this happens, this type of investment can shield you against it. You will still have returns linked to the index when the value goes up.


bajoyjoy

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I think insurance companies will be more aggressive this year and in the coming years, after the Insurance Code has been amended last year. Mas malaki na ang minimum capital requirements for insurers, so kasama na rin siguro yan sa objectives nila for going into derivatives products like call/put options that will cover for the risks on the underlying investments/stocks.


 


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