Tracker Bonds

[liverhoop]

I am looking for any information that people might have on tracker bonds. I have trawled the internet for information on these products and have still not satisfied myself that I understand them completely.

My main issue is in relation to the derivatives component of the product. It is clear that the majority of the investment is put into a fixed term deposit to make up the capital guarantee. Also, a certain percentage goes into fees. About 10% goes towards purchasing options, which track the components of the basket on which the "performance" of the bond is based. What types of option are these - call options? Also, how does volatility affect the price of these options? If the options are on US stocks while the investor is based in Europe, how is the currency risk managed? Is this included in the option?

Most of the tracker bonds have averaging provisions, ostensibly to limit downside risk, but are there advantages from a providers point of view for averaging? Does it make the options cheaper?

These are my main questions but any other useful information on the products and opinions on them would be appreciated.

 

[piglet]

These are poor constructions IMHO where the cost of the guarantee at current rates of interest requires a very high deposit account content leaving little for options after providers have eaten up 4% to 8% typically in margins in the background. These margins remain hidden even under the Life Office disclosure rules except for the bit that is passed through in sales commissions to agents usually 3% to 4%. Avoid is my rule.

 

[ClubMan]

There should be lots of previous discussion of tracker bonds on AAM.

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