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Structured Notes
Eades, Kenneth M.; Bashani, Surendra Case F-1618 / Published May 4, 2010 / 10 pages.
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Product Overview

The case is appropriate for use in finance courses but requires knowledge of option pricing, including put-call parity. Students should also have had exposure to the principles of financial engineering. Can be taught as part of a risk-management module in a corporate finance elective also is appropriate for a derivatives course from the standpoint of designing and pricing a financially engineered product. The risk management aspect of the case is conducive to productive discussion regarding the regulation of derivatives as part of the reform of the financial system in reaction to the financial crisis. This case describes a structured note marketed during the aftermath of the financial crisis of 2007-08. The security in this case was an index knock-out note, which had been designed by Credit Suisse for the private banking market. Adopting the viewpoint of a private banking client, students must decide whether they would invest in the note based on its unique risk profile.


Learning Objectives

Understand the financial engineering behind a derivative security such as the structured note Learn how a derivative security can be replicated using publicly available securities such as puts, calls, stocks, and bonds. Learn how a dynamic hedge can be used to offset the knock-out feature of a structured note. Discuss the risk management implications for financial institutions that issue derivative securities. Discuss the role of derivatives in a well functioning financial system and the role of regulation in abating the potentially harmful consequences when financial institutions take abnormally high exposures with derivatives.

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  • Overview

    The case is appropriate for use in finance courses but requires knowledge of option pricing, including put-call parity. Students should also have had exposure to the principles of financial engineering. Can be taught as part of a risk-management module in a corporate finance elective also is appropriate for a derivatives course from the standpoint of designing and pricing a financially engineered product. The risk management aspect of the case is conducive to productive discussion regarding the regulation of derivatives as part of the reform of the financial system in reaction to the financial crisis. This case describes a structured note marketed during the aftermath of the financial crisis of 2007-08. The security in this case was an index knock-out note, which had been designed by Credit Suisse for the private banking market. Adopting the viewpoint of a private banking client, students must decide whether they would invest in the note based on its unique risk profile.

  • Learning Objectives

    Learning Objectives

    Understand the financial engineering behind a derivative security such as the structured note Learn how a derivative security can be replicated using publicly available securities such as puts, calls, stocks, and bonds. Learn how a dynamic hedge can be used to offset the knock-out feature of a structured note. Discuss the risk management implications for financial institutions that issue derivative securities. Discuss the role of derivatives in a well functioning financial system and the role of regulation in abating the potentially harmful consequences when financial institutions take abnormally high exposures with derivatives.