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How does an Equity-linked investment (ELI) work?

See how an equity-linked investment (ELI) may work for you through different scenarios

Important risk warning 

Introduction

Scenarios you may encounter when investing in ELIs

Scenarios you may encounter when investing in ELIs

An equity-linked investment (ELI) is a type of structured product. Its investment return is directly linked to the performance of a single underlying equity or a basket of up to 4 underlying equities.

An ELI is typically a short to medium-term investment product that may provide potential yield enhancement. On top of this potential interest, investors could either receive 100% of their initial principal investment or stock delivery of the worst-performing stock at a discounted price lower than the initial spot price upon maturity.

But in the worst-case scenario, the stock price can drop to 0 which means that the stock investors receive can be worth nothing.

ELIs can seem complex but these examples will help you understand what scenarios you may run into when you invest in an ELI and what it will mean for your investment.

Scenario 1

Scenario 1: Autocall condition is satisfied

Autocall condition is satisfied

If the worst-performing reference asset price is at or above the call price on the call date, then the ELI will be terminated early. You will receive:

  • a full redemption of the invested amount
  • the potential cash dividend amount up to the call date

Scenario 2

Scenario 2: Closing price is equal to or above the exercise price

Closing price is equal to or above the exercise price

If the closing price is equal to or above the exercise price on expiry date, you will receive:

  • a full redemption of the invested amount
  • the potential cash dividend amount

Scenario 3

Scenario 3 : Closing price is lower than the exercise price with knock-in (airbag) triggered

Closing price is lower than the exercise price with knock-in (airbag) triggered (for product with daily knock in observation)

If the closing price is lower than the exercise price on the expiry date and the knock-in is triggered, you will receive either a physical or cash settlement.

(a) Physical settlement

  • Delivery of the worst-performing reference asset (fractional share may result in delivery of cash in addition to the share)
  • Potential cash dividend amount

or

(b) Cash settlement

  • Cash equivalent of the physical settlement amount
  • Potential cash dividend amount

Scenario 4

Scenario 4 : Closing price is lower than the exercise price with knock-in (airbag) triggered

Closing price is lower than the exercise price with knock-in (airbag) triggered (for product with daily knock in observation)

If the closing price is lower than the exercise price on the expiry date and the knock-in is triggered, you will receive either a physical or cash settlement.

(a) Physical settlement

  • Delivery of the worst-performing reference asset (fractional share may result in delivery of cash in addition to the share)
  • Potential cash dividend amount

or

(b) Cash settlement

  • Cash equivalent of the physical settlement amount
  • Potential cash dividend amount

Worst-case scenario

Closing price of a settlement stock drops to zero

In the worst-case scenario, the physical settlement amount or the cash equivalent of the physical settlement amount could be worth nothing (ie if the closing price of a settlement stock drops to zero you could lose 100% of your initial investment amount).

If HSBC as issuer becomes insolvent or defaults on its obligations under the ELIs, investor may get nothing back, including the nominal amount, any accrued potential cash dividend amounts, the physical settlement amount or the cash equivalent of the physical settlement amount regardless of the price performance of the reference assets. The potential maximum loss could then be 100% of the initial investment amount.

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Scenario analysis disclaimer 

The above scenarios are provided for illustrative purposes only, and do not reflect a complete analysis of all possible gain and loss scenarios that may arise during any actual investment. No representation or warranty is made by the Bank that any scenario described above can be duplicated under real investment conditions. Actual results may vary from the results shown above, and variations may be material.

Disclaimer, important information about sustainable investing & risk disclosures 

Disclaimer

  • The information shown in this website is neither a recommendation, an offer, nor a solicitation for any investment product or service. Investment involves risk. You should carefully consider whether any investment product or service mentioned herein is appropriate for you in view of your personal circumstances. Past performance is no guide to future performance. Investors should refer to the individual product explanatory memorandum or offering document for further details and risks involved. The price of investment products may move up or down. Losses may be incurred as well as profits made as a result of buying and selling investment products.
  • The Securities and Futures Commission (the 'SFC') has authorized the Equity Linked Investments and offering documents of Equity Linked Investments. The SFC's authorization does not imply official recommendation or endorsement of Equity Linked Investments, nor does it guarantee the commercial merits of Equity Linked Investments or its performance.

 

Important Information about sustainable investing

"Sustainable investments" include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors (collectively, "sustainability") to varying degrees. Certain instruments we include within this category may be in the process of changing to deliver sustainability outcomes.

There is no guarantee that sustainable investments will produce returns similar to those which don't consider these factors. Sustainable investments may diverge from traditional market benchmarks.

In addition, there is no standard definition of, or measurement criteria for sustainable investments, or the impact of sustainable investments ("sustainability impact"). Sustainable investment and sustainability impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.

HSBC may rely on measurement criteria devised and/or reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the sustainability impact or measurement criteria of an investment will be aligned with any particular investor's sustainability goals; or (b) that the stated level or target level of sustainability impact will be achieved.

Sustainable investing is an evolving area and new regulations may come into effect which may affect how an investment is categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.


Risk disclosure – Equity-linked Investments (ELIs)

The following risks should be read together with the other risks contained in the 'risk warnings' section in the relevant offering documents of the ELIs.

  • You should note that the information contained in this material does NOT form part of the offering documents of our ELIs.
    1. You should read all the offering documents of our ELIs (including the programme memorandum, the financial disclosure document, the relevant product booklet and the indicative term sheet and any addendum to any of such documents) before deciding whether to invest in our ELIs. If you have any doubts about the content of this material, you should seek independent professional advice.
    2. Not a time deposit – ELI is NOT equivalent to, nor should it be treated as a substitute for, time deposit. It is NOT a protected deposit and is NOT protected by the Deposit Protection Scheme in Hong Kong.
    3. Not principal-protected – ELIs are not principal-protected: you could lose all of your investment.
    4. Limited potential gain – You may not receive any potential cash dividend amount. The maximum potential gain under this product is capped at an amount equal to the sum of the difference between the issue price and the nominal amount of the ELIs (if any, and less any cash settlement expenses) and the maximum periodic potential cash dividend amount(s) payable during the scheduled tenor (ie the period from and including the issue date, to and including the settlement date) of the ELIs. It is possible that you may not receive any potential cash dividend amount for the entire scheduled tenor of the ELIs.
    5. Re-investment risk – If our ELIs are terminated early, we will pay you the nominal amount of the ELIs (less any cash settlement expenses), and any accrued potential cash dividend amount calculated up to and including that call date. No further potential cash dividend amount will be payable following such early termination. Market conditions may have changed and you may not be able to enjoy the same rate of return if you re-invest these proceeds in other investments with similar risk parameters.
    6. No collateral – ELIs are not secured on any of our assets or any collateral.
    7. Limited market-making arrangements are available and you may suffer a loss if you sell your ELIs before expiry. Our ELIs are designed to be held to their settlement date. Limited market making arrangements are available on a bi-weekly basis for all our ELIs. If you try to sell your ELIs before expiry, the amount you receive for each ELI may be substantially less than the issue price you paid for each ELI.
    8. Not the same as investing in the reference asset – Investing in our ELIs is not the same as investing in the reference asset. Changes in the market price of the reference asset may not lead to a corresponding change in the market value of, or your potential payout under, the ELIs.
    9. Not covered by the Investor Compensation Fund – Our ELIs are not listed on any stock exchange and are not covered by the Investor Compensation Fund. There may not be any active or liquid secondary market.
    10. Maximum loss upon HSBC's default or insolvency – Our ELIs constitute general, unsecured and unsubordinated contractual obligations of HSBC as issuer and of no other person (including the ultimate holding company of our group, HSBC Holdings plc). When you buy our ELIs, you will be relying on HSBC's creditworthiness. If HSBC becomes insolvent or defaults on its obligations under the ELIs, in the worst case scenario, you could lose all of your investment.
    11. Risks relating to RMB – You should note that the value of RMB against other foreign currencies fluctuates and will be affected by, amongst other things, the PRC government's control (eg the PRC government regulates conversion between RMB and foreign currencies), which may adversely affect your return under this product when you convert RMB into your home currency. The value of your RMB-denominated ELIs will be subject to the risk of exchange rate fluctuation. If you choose to convert your RMB deposit to other currencies at an exchange rate that is less favourable than that in which you made your original conversion to RMB, you may suffer loss in principal. This product (if denominated in RMB) will be denominated and settled in RMB deliverable in Hong Kong, which is different from that of RMB deliverable in mainland China.
    12. You may, at settlement, receive physical delivery of reference asset(s).
    13. Our ELIs may be terminated early by us according to the terms as set out in offering documents of our ELIs.
    14. Our ELIs are structured investment products which are embedded with derivatives.
    15. Investment returns (if any) not denominated in home currency are exposed to exchange rate fluctuations. Rates of exchange may cause the value of investments to go up or down.
  • The Hongkong and Shanghai Banking Corporation Limited is the issuer and product arranger of our ELIs.
  • The information contained in this website have not been reviewed by the Securities and Futures Commission of Hong Kong or any regulatory authority in Hong Kong.
  • Investment involves risk. The price of structured products may move up or down. Losses may be incurred as well as profits made as a result of buying and selling structured products.
  • You should carefully consider whether any investment products or services mentioned herein are appropriate for you in view of your investment experience, objectives, financial resources and circumstances.
  • Making available to you any advertisements, marketing or promotional materials, market information or other information relating to a product or service shall not, by itself, constitute solicitation of the sale or recommendation of any product or service. If you wish to receive solicitation or recommendation