The Australian Bond
The investment is linked to the Standard & Poor’s ASX200 Index which tracks the performance of the top 200 companies in Australia. The ASX200 is a small yet volatile and fascinating index, hence the requirement for capital protection.
The index’s largest sectors are 40% financials, 24% materials (mainly mining) and 8% industrials. The index includes some of the world’s largest mining companies such as BHP Biliton and Rio Tinto, but also has some specialised mining companies such as Aquarius Platinum, Bluescope Steel, Kagara Zinc, Lihir Gold, Macarthur Coal and Mount Gibson Iron. Australia is often overlooked when looking at investing globally and usually gets included in the Asia Pacific region. However, in recent years Australia has increased its importance in investment markets, mainly through the emergence of the growing dependency on commodities. Australia has some of the largest mines in the world and is well situated for trade with many of the emerging Asian economies.
Outline of operation of the bond
The investment has a fixed five-year term with 100% capital protection, i.e. if £10,000 is invested then the minimum return of actual money in five years’ time is £10,000.
When the product is launched, monies are pooled and invested at the strike date. At the strike date, HSBC place sufficient monies in an HSBC bond, so that over a five-year period this money grows back to the investment value. The residual funds are then available to take a financial option on the performance of either an individual index (in this case the Australian Equity Index) or a group of indices. In establishing the option, the price is governed by not only the price of the option, but the volatility of the markets and the underlying rate of interest. The higher the rate of interest the more money there is to invest in the option.
The investment return of the product is governed at outset by the participation rate. With a relatively low volatile investment index, such as the UK, then the participation levels that are established for the option could be around 80% to 100%. For more speculative indices, the price of those options is higher and this gives rise to a low participation level of between 50% and 90% as an example.
July 2008
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