Option protected product. Using Options to Create Capital Protected Investment – CPI

Application date Capital protected products and borrowings As an investor, you may use a capital protected product also known as a capital protected borrowing.

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This typically involves an arrangement under which you use a limited recourse to fund the acquisition of shares, units in a unit trust units or stapled securities, either directly or indirectly. Common types of capital protected products include: capital protected loans Capital protected products also include arrangements where: you use shares, units or stapled securities as security for borrowing money or obtaining credit those shares, units or stapled securities are protected from a fall in their value.

How investors use capital protected products Typically, capital protected loans involve the use of a limited recourse loan to directly acquire shares, units or stapled securities. option protected product

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Other capital protected products include 'put options' and instalment warrants. Limited recourse loan With a limited recourse loan, if, as the borrower, you default on the loan, the lender is limited in the action that it can take to recover the amount loaned.

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For a capital protected product, the lender's recourse is limited to the underlying shares, units or stapled securities. This means that you can return the shares, units or stapled securities to the lender in full satisfaction of your outstanding loan obligations, either: directly, or indirectly — by going into default, leaving the lender the ability to only recover the shares, units or stapled securities.

Because of the capital protection feature in a limited recourse loan, the lender will usually charge you higher rates of interest or additional fees.

How are options used to structure a capital protected product? Benedetta 4 min read First things first, what is an option?

Capital protected borrowings can also include full recourse loans used to acquire shares, units and stapled securities where a fall in the market value of the shares, units or stapled securities is protected. One way of providing this protection is through the use of a put option.

Put option Another common method for capital protection is through the use of a 'put option', which is normally used in conjunction with either a full recourse loan or a limited recourse loan facility.

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In general terms, a put option gives you the right to 'put' or sell the underlying shares or securities back to the lender for the higher of market value or the amount outstanding under the loan. Instalment warrant An instalment warrant is a option protected product type of security that provides for the purchase of shares, units or stapled securities, through the payment of several instalments over the life of the warrant.

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The warrant itself is tradeable and can be listed on the Australian Securities Exchange. As the holder of the warrant, you are entitled to dividends or distributions paid option protected product relation to the underlying instrument.

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You may also be entitled to exercise the voting rights attached to the underlying instrument. If an instalment warrant product is also capital protected, the instalment payments apart from the first instalment are usually financed by a limited recourse loan.

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There is also generally a put option incorporated under these arrangements. The put option instead of the limited recourse facility is effectively providing the capital protection to the investor if both of the following apply: A capital protected product features option protected product a put option and a limited recourse facility. The exercise price of the put option is the amount outstanding under the loan.

Claiming a deduction The interest incurred on loans associated with capital protected products which did not separately identify or attach value to the loan's capital protection component is fully deductible.

The Bottom Line For most investors, the safety of invested money often becomes the deciding factor while selecting investment options. This article assumes familiarity of the reader with options. It essentially means that your invested amount may increase or decrease in value. While profits are always desirable, investors worry the most about the loss of the money they invested in the first place. Capital protected investment products not just provide the upward profit potential, they also guarantee the protection of your capital investment fully or partially.

Application date The options for calculating interest deductions for capital protected borrowings have changed and there are some retrospective options: Before late — our view was that part of the 'interest' on the loan associated with a capital protected product was a non-deductible capital protection fee.

Late — the Full Federal Court held that interest incurred on loans associated with capital protected products which did not separately identify or attach value to the loan's capital protection component was fully deductible.

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April — we introduced an interim methodology for a capital protected borrowing entered or extended at or after 9. May — the benchmark rate to be used for capital protected borrowings changed on option protected product May to the Reserve Bank's standard housing rate.

Certain option and index products, including those proprietary to Cboe, may be recommended by Cboe Vest and its subsidiaries from time to time. Such products may trade on one or more Cboe-affiliated exchanges, resulting in transaction and other revenues accruing to Cboe. Any views expressed herein are solely those of Cboe Vest and not of Cboe.

Find out about: How to calculate deductions for a capital protected borrowing explains which treatment applies to your product. There are various products that may be used to protect the capital of investors in shares or securities.

Last modified: 23 Aug QC Footer.

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