Hong Kong Financial News

In Hong Kong, this type of accumulator / decumulator was very extremely popular in 2007 among all private banks. Private banking clients were making good money every day that time. But things change quickly and in this bear market environment these investores are incurring big losses every day with these accumulator contracts that were started during the bull year. The media has even given accumulators a very appropriate name of “I kill you later”.

What are these contracts actually? If you are familiar with options, they are actually a set of one long in-the-money call option, and two short out-of-the-money options. Let’s look at a simple example of one year HSBC accumulator contract.

Suppose the share price of HSBC is HK$100. If you buy a one-year accumulator contract, here is what you will get on each trading day:

You will get to buy a certain number of HSBC shares at a set price, usually at a discount to the current share price, e.g. HK$ 97, for the entire year.

So as long as the share price of HSBC is above $97, you can receive the shares and sell the shares on the market, and you make money every day for one year!

Of course there are catches. It will be very costly to long a series of call options. To make the transaction cheaper, the call option is a knock-out option because it is cheaper. A knock-out option limits the upside you can get. For example, if the knock-out value is HK$ 105 and one day the share price is above HK$105, the whole contract expires and you won’t be receiving any more shares from that day onward.

Furthermore, to make the accumulator cheaper, the investor are selling two puts to subsidize the cost of the knock-out call. When shorting a put, the investor receives share at a higher price when the share price is below the strike price. Let’s say the put strike price in the above HSBC accumulator example is $92: when the current share price is $90, the investor will be required to receive a certain number of shares at $92. The investor is losing $2 per share he receives. And to make the matter worse, since you are shorting two puts for each call, you will be receiving twice the number of shares at $92! With the stock market losing more than 50% this year, we can see that there are a lot of private banking clients who are receiving lots of shares every day at a price much higher than the current price!

Basically with an accumulator, you’ve got limited upside but doubled unlimted downside.

A decumulator works the opposite way. This is essentially the opposite of an accumulator. The investor longs a put and shorts two calls.

November 1st, 2008 | Tags: accumulator, decumulator, Hong Kong, private banks | Category: Uncategorized | Subscribe to comments | Comments are currently closed | Trackback URL