Yes1, and it is simple.
Customers may contact us to submit a redemption request. After the request is sent, here’s what happens under the hood.
1. Fees and Cost
Until September 2024, all early trading fees are waived, meaning there is a $0 early trading fee for all customers. After September 2024, a 0.5% early trading fee on the note's principal will be charged if the redemption is successful.
We do not charge a spread2 on the options for early redemptions. This means the price we receive from our trading partners is what you get.
2. How is my note’s redemption value determined?
As mentioned in our prior posts, structured notes are nothing more than a combination of long positions3 in:
US treasury bill, and
Call options on an underlying asset, such as Bitcoin.
Therefore:
Redemption Value = T-Bill Bid Price + Options Bid Price
Where:
Redemption Value
is the note’s total redemption valueT-Bill Bid Price
is the price at which the t-bill within a note’s underlying portfolio4 can be soldOptions Bid Price
is the price at which the options of a note can be sold
To determine the redemption value of a principal-hedged note, we need the closing bid prices of both the T-bill and the option contracts.
Redemption Value Example:
September 25, 2023: a customer bought a Bitcoin index linked principal hedged note for $100,000. The note has the following underlying portfolio:
$95,000 was used to buy a US t-bill
$5,000 was used to buy a set of call options
December 3, 2023: the customer needs to redeem the note to buy a car. Suppose we can get the following quotes on December 3, 2023 for the various instruments:
The US T-bill has a bid-side quote of $97,000 through our broker's exchange
The call options has a bid side quote for $12,000 through one of our option trading counterparties
Hence, the redemption value of the note would be:
$97,000 + $12,000 = $105,000
3. How Do We Trade to Close the Positions?
US T-Bills
We trade US T-bills through an exchange via our onshore broker. After settlement the proceeds and the security are custodied at an onshore qualified custodian.
US T-bill is one of the most liquid instruments in the market. Bid and ask spread, which is an indication of liquidity, is usually between 2 - 10bps.5 These exchange traded fixed income has market hours of between 5am to 2pm pacific time.
This means we can place a trade for a t-bill and be fairly certain that we will get the proceeds at close to fair market value.
Option Contracts
We trade the option contracts through our trading counterparties6. These counterparties would provide a closing bid7 to Fig Investments, indicating the price at which they are willing to close the option contact, if any. 8
Before placing a closing trade, we will provide an indicative quote to the customer on the redemption value to confirm whether to proceed.
Over-the-counter Bitcoin and Ether option contracts may be quoted 24/7, depending on the specific trading counterparty.
4. How Do I Receive the Redemption Proceeds
After confirming and settling9 redemption value of the note, the proceeds are wired via SWIFT to customer’s bank account of choice.
Wire payments are typically received within 24-48 business hours.
Uncompromising Transparency
Fig Investments does not take the opposite side of a customer's trades. This means we show you exactly the market price that can be obtained for the T-bills and options from available counterparties, both on the buy and sell sides.
If we charge you a fee on the cost, we will disclose it to you directly via Fig’s platform.
There are no hidden or opaque calculations and fees.
About Fig Investments
Fig Investments specializes in using
Options
Fixed Income
To help investors achieve risk managed returns on Bitcoin and Ether.
To learn more, please visit us at https://fig.investments.
Disclaimer: The information provided in this blog post is for educational and informational purposes only and is not intended as financial advice. The content is not meant to provide, and should not be relied upon for investment, accounting, legal, or tax advice. You should consult your own financial, legal, tax, or other professional advisors before engaging in any transaction. The views expressed on this blog are the author's own and do not necessarily reflect the views of any financial institutions or other entities. Investing in financial markets involves risks, and there is always the potential of losing money when you invest in securities. Past performance is not indicative of future results.
Although under most circumstances the notes may be early redeemed, liquidity can not be absolutely guaranteed at all times. Take example in 2008: banks are even unwilling to lend overnight loans to each other because of market stress! Structured notes are no different.
Factors such as macro economic conditions, market liquidity, interest rate, and counterparty risk tolerance affects whether a trading counterparty would want to take a trade with us.
“Spread” means difference between the cost of the options from where we bought them from vs the cost of the options charged to our customers.
“Long position” means that we are buying or have bought certain asset or contract. For example: if I am long Apple stock, that means I have bought Apple stock and currently hold the stocks on my books.
Structured notes are like mini portfolios! Hence we use the term underlying portfolio to represent the composing instruments of a principal protected note.
“bps” is an industry term that refers to “basis points”. 1bps means 0.01%.
Normally when you trade an asset through an exchange, the clearing house is the “counterparty”, which is a centralized entity that guarantees that all trades will be “cleared” - meaning money will be sent to the seller in order for a financial contract or asset to be delivered to the buyer. Counterparty just means you trade directly with Company A who will sell or buy a financial contract or asset from or to you. There is no middle “clearing house” to help you with the trade.
Unless you are a sophisticated trader, you are probably familiar with exchange traded assets such as most stocks, options, and maybe fixed income through your broker.
Over-the-counter (OTC) trading is usually performed by professional investors who need more customization, size, and privacy. Hence OTC trading is not well understood by general public. However, there are over $630 trillion in notional derivatives traded through OTC in 2023 alone! It is a big and relatively opaque market.
Sometimes a counterparty may not provide a closing price at all. This could be due to various reasons but a counterparty is not, under most circumstances, legally obligated to help you close a trading position.
“Settlement" refers to the process of completing a transaction or financial contract where the parties involved fulfill their respective obligations, typically involving the transfer of funds and securities.