BNP Paribas distributor StartPoint offers three times FTSE 100 rise

StartPoint Investments has released a six-year autocall growth product backed by BNP Paribas Arbitrage Issuance that pays three times any upside in the FTSE 100. Early maturity in year three leads to the greater of a 21% return or the rise in the index

StartPoint Investments is distributing a new deal linked to the FTSE 100 index. This is a six-year investment that will be called and mature early, paying the greater of a 21% fixed return or the rise in the FTSE 100, if the index is equal to or higher than its initial level on the relevant observation date three years into the product term. If kickout does not occur and the index is higher than its initial level at maturity, investors will be paid three times the positive index performance up to a maximum return of 75% (in addition to capital). If the product is not called and the 60% European barrier is breached at maturity, investors could lose capital.

Leveraged participation in the growth of the underlying asset usually comes at the cost of reduced downside protection, but growth products with longer terms can offer higher market participation rates as the cost of capital protection is reduced, leaving more money to spend on generating upside potential. The market cap will be reached if the underlying rises by more than 25% from its initial level at the end of the investment term (gearing of 3 x 25% = the 75% cap). Any growth in the index above 25% will not be passed on to investors. It is worth highlighting that market-capped products can offer higher participation rates than uncapped products.

This type of investment is known as a leveraged growth product with an autocall feature. If the underlying is equal to or higher than the required target level on the specified measurement date, the product will mature early, returning initial capital plus a payment equal to the greater of the rise in the index or 21%.

If the product is not called on the specified measurement date it will continue to its full term. If the index is higher than its initial level at maturity, investors will receive a return equal to three times the growth, subject to the maximum return of 75%. For example, if the product has not kicked out and the final index level is 110% of the initial level, investors will receive a return of 130% including capital.

The product has a European barrier, which is observed at maturity only. The barrier is set at 60% and will be breached if the final level of the index is lower than 60% of its starting level. If kickout does not occur and the closing level of the index is equal to or higher than 60% of the initial level, investors will receive no additional returns beyond their invested capital.

If the product reaches maturity and the final level of the index is below the barrier, investors will be paid an amount based on the final index level. For example, if the final level of the index is 40% of its initial level, the barrier will have been breached and investors will be returned 40% of their capital investment - a loss of 60%.

Pricing and risk

The level of risk in structured products ranges from high-return structures aimed at very bullish investors to capital-protected products aimed at the more cautious. This product combines an autocall feature with the possibility of obtaining returns above the fixed return, which is not typical in standard autocallable structures.

In order to offer a barrier in the product terms, an issuer will typically sell a put option with a down-and-in barrier. Once the barrier is breached by the underlying asset either falling below the barrier level during the product term or finishing below it at maturity (as in this product), the barrier is knocked in and the put is activated. Once this happens, the amount of capital returned to investors at maturity is dependent on the final level of the underlying. If the underlying is below the barrier at maturity, capital is at risk and will be lost by an amount proportionate to the decline in the underlying asset's price from its initial level. American barriers are more likely to be breached than European versions as there is a daily possibility that the underlying will drop below the barrier level. Products with American barriers can therefore offer higher headline rates than an equivalent product with a European barrier.

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Key information

Country of issue: UK

Currency of issue: Sterling

Product type: At-risk kickout (capital not protected)

Points for:
1. If the trigger level of 100% is reached after three years, investors receive the greater of 21% or the rise in the index
2. Three times any growth in the FTSE 100 if at maturity the closing level of the index is above its opening level, capped at 75%
3. According to the literature any gains made on direct investment are subject to capital gains tax

Points against:
1. Capital is not protected at maturity if the 60% European barrier is breached
2. Investors do not benefit from index growth above 25%

Asset exposure period: Six years

Full term length: 6.05 years

Underlying Asset: FTSE 100

Final index level defined as the closing level of the index on the final day of investment

Market barrier levels: 60% - European barrier (measured at maturity only)

Investment Limits: Minimum £5,000 for direct investment and ISA transfers, maximum £11,520 for 2013/2014 ISA investment

Commission: 0%

Wrappers and investment vehicles: Charities, Corporate/Commercial, Direct Investment, ISA, ISA transfer, SIPP/SSAS, Trustees of a trust

Tax treatment outside a tax-free wrapper (according to information from the product provider): Capital gains tax

Issuing Institution / Counterparty: BNP Paribas Arbitrage Issuance

Plan Manager: Meteor Asset Management

Credit rating of investments made (according to information from the product provider): S&Ps A+.

The information in this analysis is taken from sources which Future Value Consultants Limited deems reliable but no guarantee is made that the information is complete or accurate and it should not be relied upon as such. Any opinions in the analyses represent those of Future Value Consultants Limited at the time of writing but are subject to change. All valuations and prices shown are indicative only and do not imply an offer or commitment of any kind. The analysis does not constitute advice or recommendations nor should it be relied upon for any purpose. No liability whatsoever is accepted by Future Value Consultants Limited or Structured Products magazine for any loss or expense incurred from using this analysis.