1 2 3 4 5 6 7 8 9 10 11 12 13

pothetical zero coupon bond from HSBC.

on the upside:
Long on two units of basket call op-
tions at 100
Short on two units of basket call op-
tions at 129.63 to simulate the cap.
on the downside:
Short on one unit
of a basket knock-
in put option at a
strike of 100 and
barrier of 75.
investors in this
note are at risk from
volatility of the bas-
ket, the structure
of volatility skew,
the shape of the
forward curve on the eTFs, the issuers
credit and correlation between basket
components.
Buyers of this HSBC note are long
correlation. How this measure affects
performance is a key to valuing basket
structured notes. Levels vary from -1
(completely negatively correlated) to 0
(not correlated) to 1 (completely posi-
tively correlated).
Highly positively correlated compo-
nents rally and sell off in unison. This
leads to more volatility and higher bas-
ket option prices.
at the time of issuance, SPy was .881
correlated with eFa and .86 with eeM,
while eFa and eeM had a cross correla-
tion of .906. This suggests that equi-
ties in the u.S., europe and emerging
markets move almost in lockstep.
as for the risk of issuer default, the
note is unsecured debt. The z-spread
(a measure of credit risk) for three-
year debt for hSBC uSA inc. was 313
basis points on the pricing date (that
compares with other issuers in a range
from 85 basis points for royal Bank of
Canada to 515 for Bank of America
Corp.). Higher z-spreads imply higher
risk of issuer default and lower the mar-
ket value of the note.
On the matter of liquidity, structured
products are intended to be held until
maturity, so the secondary market is
small. This note hasnt traded since issu-
ance, according to Bloomberg data.
Chandra Khandrika (ckhandrika@bloomberg.net)
values structured notes for Bloomberg clients.
Trigger Return Optimization Securi-
ties are created for investors who have
a bullish view on the underlying. The
notes typically offer leverage on returns,
up to a cap. The first such registered
securities in the u.S. may have been
sold on Jan. 26, 2011, by uBS AG and
Deutsche Bank AG, according to a
search of online records of the u.S. Se-
curities and exchange Commission.
On Sept. 27, 2011, hSBC holdings
Plc, through its u.S. unit, priced $7.69
million of notes linked to the weighted
performance of a basket of global
exchange-traded funds. The basket
(and weightings) were: the SPDR S&P
500 eTF Trust, ticker SPy (30 percent),
the iShares MSCi eaFe index Fund, or
eFa (30 percent) and the iShares MSCi
emerging Markets index Fund, or eeM
(40 percent).
The notes pay twice the gains of the
basket, to a limit, with a 25 percent buf-
fer on the downside. a 10 percent gain
in the basket produces a 20 percent re-
turn, while a 50 percent plunge breach-
es the trigger level for a 50 percent loss.
advantages include upside perfor-
mance as high as
59.26 percent in
a low interest-rate
environment and
diversification ben-
efits from exposure
to a basket of eTFs
invested in compa-
nies from Spain and
Singapore to Brazil.
Disadvantages
include the principal
being fully at risk.
The structure is an aggressive strategy
to amplify a bullish view on the market.
The note payoff can be replicated using
european-style basket options and a hy-
HSbc Leveraged basket Notes Potentially yield as Much as 59%
DecoNSTRucTiNg THe DeaL anaLySiS By CHanDRa KHanDRiKa, DeRivaTiveS PRiCing SPeCiaLiST
-60
-40
-20
0
20
40
60
80
100
50 70 90 110 130 150 170
R
e
t
u
r
n

(
%
)

Underlying
Note
Identical returns
Source: HSBC prospectus
HSBC Basket Note Offers Twice Leverage With a Cap
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The noTe
Bloomberg iD: RC8190378
asset class: equity
Principal protected: no
issuer: HSBC uSa inc.
underlying: Three eTFs (SPy, eFa, eeM)
Maturity: 3 years
upside participation: 200% (59.26% cap)
Downside participation: 100% (25% barrier)
Trade date: Sept. 27, 2011
Value of the notes
DaTe 9/27/11 8/31/12 9/28/12 10/31/12
Embedded Derivative Value -0.07 $1.43 $1.86 $1.89
Model Price $9.93 $11.43 $11.86 $11.89
Model Price (Credit Adjusted) $8.92 $11.01 $11.49 $11.60
External Price Source (Incapital) $10.89 $11.31 $11.32
12.06.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes 4
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