Are there any other market linked products like Market Linked GICs that principal is insured? | General financial discussion | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

sp_Feed Topic RSS sp_TopicIcon
Are there any other market linked products like Market Linked GICs that principal is insured?
January 25, 2023
1:46 pm
butterflycharm
Member
Members
Forum Posts: 177
Member Since:
April 19, 2019
sp_UserOfflineSmall Offline

Market linked GICs have their principals insured by FSRA and the interest is market linked and not insured (could be $0 or the max FI selects).

Are there any other products that have a similar structure? insurance from FSRA or CDIC or other source and market link interest?

January 25, 2023
9:22 pm
co
Member
Members
Forum Posts: 71
Member Since:
August 6, 2018
sp_UserOfflineSmall Offline

Even though I cannot find any direct information, the only way that I can think of how market-linked GIC can work are essentially:

  1. Buy stocks/ETF that replicate intended index at current market price
  2. Buy a put option at current market price as strike price to secure the principal in case of downside
  3. Sell a (covered) call option at higher strike price to recoup some of the cost of the put option.
  4. Invest any remaining cash in a term deposit.

The difference between the proceed from the call option and the cost of the put option makes up the "Minimum Guaranteed Interest Rate". The covered call limits the "Maximum Full Term Return".

Anyways, no need to understand any of the jargon, since this is primarily a savings forum, but important conclusions, if my belief about how market-linked GICs work are approximately correct, are:

  1. There are never any free lunch in the financial market. You are definitely buying some kind of insurance against the stock portfolio for the gauranteed capital.
  2. This kind of insurance is by definition a derivative, so this is essentially a deceptive way for financial institutions to sell complex financial derivatives to individual investors.
  3. And while I don't have the data to do the analysis, my default assumption is that the financial institutions have embedded a huge management fee into this product. In fact, this fee isn't even transparent.
  4. There is no point for CDIC coverage as the funds are fundamentally tied up in the equity market, not as deposit at a bank, unless you think somehow the stock market will fail.
  5. If you really wish to have such a product and are willing to spend an hour learning how options work, you can possibly DIY this product, likely with lower fees.

I know this doesn't answer your real question, but market-link GIC's (or any non-transparent financial products advertised to people without ability to see through it) are borderline a scam in my opinion. I'll be happy to be proven wrong though if someone is willing to comment.

January 26, 2023
5:07 am
savemoresaveoften
Member
Members
Forum Posts: 2866
Member Since:
March 30, 2017
sp_UserOfflineSmall Offline

co said
Even though I cannot find any direct information, the only way that I can think of how market-linked GIC can work are essentially:

  1. Buy stocks/ETF that replicate intended index at current market price
  2. Buy a put option at current market price as strike price to secure the principal in case of downside
  3. Sell a (covered) call option at higher strike price to recoup some of the cost of the put option.
  4. Invest any remaining cash in a term deposit.

The difference between the proceed from the call option and the cost of the put option makes up the "Minimum Guaranteed Interest Rate". The covered call limits the "Maximum Full Term Return".

Anyways, no need to understand any of the jargon, since this is primarily a savings forum, but important conclusions, if my belief about how market-linked GICs work are approximately correct, are:

  1. There are never any free lunch in the financial market. You are definitely buying some kind of insurance against the stock portfolio for the gauranteed capital.
  2. This kind of insurance is by definition a derivative, so this is essentially a deceptive way for financial institutions to sell complex financial derivatives to individual investors.
  3. And while I don't have the data to do the analysis, my default assumption is that the financial institutions have embedded a huge management fee into this product. In fact, this fee isn't even transparent.
  4. There is no point for CDIC coverage as the funds are fundamentally tied up in the equity market, not as deposit at a bank, unless you think somehow the stock market will fail.
  5. If you really wish to have such a product and are willing to spend an hour learning how options work, you can possibly DIY this product, likely with lower fees.

I know this doesn't answer your real question, but market-link GIC's (or any non-transparent financial products advertised to people without ability to see through it) are borderline a scam in my opinion. I'll be happy to be proven wrong though if someone is willing to comment.  

You nail it 90% how its priced. Also issuer keeps the dividend of the underlying basket of stocks. The fee is around $2-3 if I am not mistaken.

Its a juicy product, just not for the investors....

January 26, 2023
11:08 am
butterflycharm
Member
Members
Forum Posts: 177
Member Since:
April 19, 2019
sp_UserOfflineSmall Offline

co said
Even though I cannot find any direct information, the only way that I can think of how market-linked GIC can work are essentially:

  1. Buy stocks/ETF that replicate intended index at current market price
  2. Buy a put option at current market price as strike price to secure the principal in case of downside
  3. Sell a (covered) call option at higher strike price to recoup some of the cost of the put option.
  4. Invest any remaining cash in a term deposit.

The difference between the proceed from the call option and the cost of the put option makes up the "Minimum Guaranteed Interest Rate". The covered call limits the "Maximum Full Term Return".

Anyways, no need to understand any of the jargon, since this is primarily a savings forum, but important conclusions, if my belief about how market-linked GICs work are approximately correct, are:

  1. There are never any free lunch in the financial market. You are definitely buying some kind of insurance against the stock portfolio for the gauranteed capital.
  2. This kind of insurance is by definition a derivative, so this is essentially a deceptive way for financial institutions to sell complex financial derivatives to individual investors.
  3. And while I don't have the data to do the analysis, my default assumption is that the financial institutions have embedded a huge management fee into this product. In fact, this fee isn't even transparent.
  4. There is no point for CDIC coverage as the funds are fundamentally tied up in the equity market, not as deposit at a bank, unless you think somehow the stock market will fail.
  5. If you really wish to have such a product and are willing to spend an hour learning how options work, you can possibly DIY this product, likely with lower fees.

I know this doesn't answer your real question, but market-link GIC's (or any non-transparent financial products advertised to people without ability to see through it) are borderline a scam in my opinion. I'll be happy to be proven wrong though if someone is willing to comment.  

Some good points. I have since read on market linked GICs and sounds they are complex and not transparent so the FI wins bigger.

For casino machines there are rules that certain percentage of it should be wins for the house and rest should be loss for the house (maybe 56% for the house vs 44% for the customer). Aren't there such rules for derivates and the financial markets?

January 26, 2023
11:25 am
butterflycharm
Member
Members
Forum Posts: 177
Member Since:
April 19, 2019
sp_UserOfflineSmall Offline

The only other product I see that under FSRA insurance is:
Index-linked term deposits (principal portion only)

Are those much different than what is described for market-linked GICs?

Please write your comments in the forum.