Coupon trigger determines whether a coupon is going to be paid or not paid. In the case of a ‘worst of’ structure, coupons are paid as long as the worst performing underlying is above the coupon trigger level on the products observation date.
Let’s take a simple example assuming a structured note has a coupon trigger level of 80%. On the next observation date of the note, we’ll assume the fictive performances of the underlyings are as follows:
The worst underlying is the Hang Seng Index at 81% of its initial fixing (meaning it has dropped 19% since the product launched). As it is still higher than the coupon trigger level, the Coupons will still be paid out.
Let’s take another example by looking at the graph above:
Here we have 4 observation dates on the above product. On each observation, the investor could get a 2.50% coupon payment:
- 1st observation: Underlying is above the coupon trigger level – Coupon paid out!
- 2nd observation: Underlying is below the coupon trigger level – Missed Coupon!
- 3rd observation: Underlying is above the coupon trigger level – Coupon paid out!
- 4th observation: Underlying is above the coupon trigger level – Coupon paid out!
Even if the underlyings have fallen, the investor can still receive Coupon payments and make profit as long as the underlyings do not pass below the coupon trigger buffer.