What’s Ahead:
- Structured Note Protection can potentially eliminate or reduce market losses
- Hard Protection is a type of Structured Note Protection that can significantly decrease the potential for market losses
- Investors seeking to mitigate negative return outcomes and asset volatility tend to appreciate this Note Protection type
Market Exposure with Protection
If you’re interested in investing with a potential to significantly decrease market risk, you may find Hard Protection Notes appealing.
This brief explains how Hard or Buffer Protection, one type of Structured Note protection, can eliminate or decrease negative return outcomes.
But first, a couple basics:
- Structured Notes are like a hybrid between a stock and a bond. Although they are technically bonds, their market value typically derives from the return of a stock or index, called the Underlier.
- The Structured Note has performance terms that adjust the return of the Underlier to determine the Structured Note’s return. Those adjustments are commonly in the form of protection against negative returns and enhancement of positive returns.
What Differentiates Hard Protection Notes
Hard Protection insulates against market risk by absorbing some or all of the Structured Note’s negative return by modifying the return of the Underlier on the maturity date of the Structured Note.
When the Structured Note’s negative return is between 0% and the protection level, Hard Protection absorbs the Underlier’s negative return completely, resulting in a 0% return for the Note.
However, when the Underlier’s negative return is below the protection level, the Underlier’s loss is decreased by the protection amount, resulting in a smaller loss for the Note.
The table below shows how Hard Protection modifies the Underlier’s return:
| Underlier Return | Note Return |
|---|---|
| 0% to Protection Level | 0% |
| Below Protection Level | Underlier Return + Protection Amount |
The following chart can be used to show how Hard Protection may adjust the Underlier return across multiple market environments.
Hard Protection may be a good option if you want to eliminate or significantly decrease an asset’s negative return in moderate to severely volatile market conditions. It’s most effective in negative scenarios with significant volatility. For more information on choosing note types, we recommend reading our “Choosing a Protection Type” guide.
By understanding how Hard Protection works, you can potentially mitigate your risk in uncertain market conditions, and produce a greater return on your investment than holding the Structured Note in the traditional way.
Please see our other important disclosures.
