'Killer' stock derivatives make comeback

[Joanne98]

HONG KONG, CHINA - A type of financial derivatives blamed for destroying Asian wealth is back.

Stock accumulators - dubbed 'I kill you later' - generated controversy last year after wiping out enormous sums among high net worth individuals in Asia, said the Wall Street Journal.

Now, bankers say private wealth managers at Citigroup, UBS, HSBC and other firms are back to selling accumulators to rich clients, the paper reported yesterday. The return of the accumulator shows how rapidly the appetite for risk has recovered as investors bet that the worst of the downturn is over, said the paper.


Also driving their demand are surging stock prices in Asia, the Journal added. Since hitting lows for the year in early March, Hong Kong's Hang Seng Index has climbed 77 per cent, while key indexes in South Korea and Singapore have risen 58 per cent and 81 per cent, respectively.

Initially created by investment banks for corporate clients in Europe who wanted to build up equity positions in other firms, accumulators were then marketed to private banks and their wealthy clients in over-the-counter transactions that were not disclosed to regulators.

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http://business.asiaone.com/Business/News/My%2BMoney/Story/A1Story20090901-164958.html

[Statistical]

1. I hate it when media can't get basic financial terms right

Accumulators oblige investors to buy shares at a fixed price - usually a discount to prevailing market rates - at regular intervals, explained the Journal. If the stock's market price continues to gain, investors can pocket a hefty return. The contracts usually include a kick-out feature that causes the contract to expire if shares rise above a certain level.

But the potential for easy money carries big risk: Losses when share prices fall are unlimited for the duration of the contract, noted the paper.

Completely false.

The loss can be substantial but it is finite.

Total loss = (# of shares covered in the contract * buying price of the contract) Since both numbers are finite the product is finite.

Naked short selling for example is theoretically an unlimited Loss.

If you short sell 1 share at $10 and it goes to $20 you lose 100%, if it goes to $100 then you lose 1000%, if it goes to $5000 then you lose 50,000%.
Given there is no theoretical limit on a stock price you potential loss is unlimited.