How to Analyze Structured Products: Demonstrating with Tesla
Movchan's Group
Feb 12, 2025Our clients often reach out to us asking for our opinion on various investment instruments offered to them by their private banks and brokers. Recently, one of the clients asked us to express our opinion on a structured product offered to him on Tesla shares.
How does the product work?
1️⃣ First 11 months (M1–M11):
- The investor receives a fixed coupon of 0.93% per month (11.2% per annum).
- Early redemption during this period is not provided.
2️⃣ From the 12th month (M12–M23), early redemption of the instrument is possible:
- Each month, the price of Tesla shares is checked against a certain threshold (early redemption barrier).
- If the price is above the barrier, the product is redeemed early, and the investor receives 100% of the capital + a coupon of 0.93%.
- If the price is below the barrier, the product is not redeemed, but the investor still receives the coupon.The barrier gradually decreases:
3️⃣ Payment at the end of the term (after 2 years):
- The price of Tesla shares is checked again.
- If the share price ≥ 60% of the initial level: ✅ The investor receives the entire investment amount + a coupon of 0.93%.
- If the share price < 60% of the initial level:
❌ The last coupon is paid, and the investor receives Tesla shares at a price equal to 60% of the initial level.
From the client's perspective, this offer looked like an opportunity to receive a guaranteed coupon of 11.2% per annum in US dollars with the risk that Tesla shares would fall by more than 40%. And even in this case, achieve a result better than if he simply bought Tesla shares at the current price.
Once I came across a statement by a famous trader that all the problems of the derivatives market are due to speculators trading options based on complex mathematical formulas. Allegedly, before Black and Scholes introduced their famous formula to the world, option prices were formed based on supply and demand, when real traders and managers decided how much they were willing to pay or how much they wanted to receive for the right to buy or sell a stock at a certain price.
The problem is that formulas poorly account for tail risks and do not consider the probability of corporate events at all. Because of this, option sellers often lose more than they anticipated.
This thesis seems especially reasonable when it comes to assets with a relatively short trading history. The trading history of Tesla shares is about 15 years, which, on one hand, is not so little. On the other hand, this period does not cover two of the three most significant market crises in its recent history — the dot-com bubble burst in 2000 and the global financial crisis of 2008.
Therefore, in addition to analyzing historical data and assessing the fair value of this product using various statistical models, it makes sense to look at it from the perspective of simple common sense. Here is a very short numerical series for you: 23.5; 400; 104; 426. This is the value of Tesla shares in November 2019, November 2021, January 2023, and January 2024, respectively. That is, in just the last 5 years, the shares have shown a 16-fold increase, a 4-fold decrease, and a 4-fold increase again. Each of these movements fit within a two-year timeframe.
Now ask yourself: is a 12% annual return sufficient compensation for you for the risk of losing more than half of your investments and not profiting from a multiple increase in stock value? If your answer is 'yes' and you can reasonably explain (at least to yourself) why such scenarios in Tesla shares will not materialize in the next two years, then this instrument is suitable for you. Otherwise, it makes sense to look for instruments with a more symmetrical risk/return profile.
P. S. Since the client received this offer from his broker and we gave him our comment, Tesla shares have decreased by 20%.
