Do the Underlying Portfolios Matter? A Comparative Study of Equity-Linked Pay-at-Maturity Principal Protected Notes in Canada and the UK

Li Y., Anderson S., McGraw P. A.

Journal of Risk and Financial Management, vol.15, no.10, 2022 (ESCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 15 Issue: 10
  • Publication Date: 2022
  • Doi Number: 10.3390/jrfm15100462
  • Journal Name: Journal of Risk and Financial Management
  • Journal Indexes: Emerging Sources Citation Index (ESCI), Scopus, ABI/INFORM, EconLit, Directory of Open Access Journals
  • Keywords: structured products, underlying portfolio, mean return, volatility, asset pricing complexity
  • TED University Affiliated: No


© 2022 by the authors.This study examines the relationship between the return and the holding cost of equity-linked pay-at-maturity principal protected notes (EL-PAM-PPNs) and the mean return and volatility of the underlying portfolio using 1568 EL-PAM-PPNs issued in the UK and Canada between 2003 and 2015. We find that: (i) the underlying portfolio’s mean return decreases the note holding cost; (ii) the underlying portfolio’s volatility increases the note return and decreases the note holding cost; (iii) investors could maximize note return and minimize holding costs by choosing EL-PAM-PPNs prudently. Investors in both countries should purchase notes with higher participation rates, where the underlying portfolio contains a higher number of stocks and lower expected volatility. UK investors should avoid callable notes and choose notes with a longer time to maturity, where payoff is determined by a single observation of the underlying portfolio’s value at maturity. Surprisingly, Canadian investors should choose callable notes and notes with a shorter time to maturity, where payoff is determined by the average of multiple observations of the underlying portfolio’s value over the life of the note. They should also look for notes that include a guaranteed positive return, and where the underlying asset has a higher dividend yield.