Wednesday, December 12, 2012

Structured Products Highlight: Citigroup ELKS Linked to YAHOO!

By Tim Dulaney, PhD

Today we're highlighting a structured product issued on May 25, 2011 by Citigroup.  This product (CUSIP: 17317U501) is an Equity LinKed Security (ELKS) linked to Yahoo! (YHOO).

ELKS are similar to reverse exchangeables in that the notes pay periodic coupons (monthly at an annualized rate of 9.50% in this case) and protect principal on a limited basis (if YHOO's price remains above the $13.08 trigger during the term of the note).  In contrast to reverse exchangeables, once a trigger event occurs during the term of the note, the notes convert to a fixed number of shares of the underlying stock (0.61 shares per $10 note).  This feature exposes investors to both depreciation and appreciation of the asset whereas reverse exchangeables only expose investors to the depreciation if a trigger event occurs. See the following figure for more details.


A trigger event occurred on August 2, 2011 -- the closing price of YAHOO! was $12.76, below the $13.08 trigger -- and the notes converted to 0.61 shares of YAHOO!.  At the November 21, 2011 valuation date, the closing price of YAHOO! was $14.99 -- 8.31% below the pricing date value of $16.35.  As a result, investors realized a loss of about 7.1% including the coupon payments received during the six month term of the notes. 

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