1 2 3 4 5 6 7 8 9 10

principal could be lost.

(2) Credit (issuer default): the note is
unsecured debt. Credit risk is implied from
the value of the issuers corporate bonds
using z-spreads over
risk-free rates. the z-
spread for 18-month
debt for hsBC hold-
ings was 157 basis
points on the pricing
date. Z-spreads for
similar-maturity debt
for other issuers
ranged from 31.3
basis points for Royal
Bank of Canada to
210.3 for Bank of America Corp. higher
z-spreads imply higher risk of issuer default
and lower the market value of the note.
(3) liquidity: structured products are
intended to be held until maturity, so the
secondary market is small. in more than
three months since its issuance, this note
has traded once on June 14, based on
data from the Financial industry regula-
tory Authoritys trace system.
the actual value of each $1,000 note,
at issuance and on end-of-month dates
since then, is broken down in the table
below, using Bloomberg analytics. Value
of derivatives indicates the fair market
value of the embedded derivatives. Model
price reflects the value of the deriva-
tives, and credit-adjusted model price
adds credit risk. External levels are prices
provided by other sources, in this case
Financial times interactive data.
Chandra Khandrika does valuations of structured
notes for Bloomberg clients. He can be reached
at ckhandrika1@bloomberg.net.
yield enhancement notes provide inves-
tors exposure to the gains of an equity
index, sometimes using leverage, with re-
turns capped and losses buffered. in a low
interest rate environment, these securities
often look attractive.
on April 2, HSBC Holdings Plc priced
$103,000 of so-called Buffered Accelerated
Market Participation securities (AMPs).
investors receive twice the gains in the
standard & Poors 500 index, up to a cap
of 12.5 percent. if the index rises 20 per-
cent, the return is only 12.5 percent. on the
downside, the note protects against losses
of up to 10 percent. if the s&P 500 drops
60 percent, the loss is 50 percent.
this notes payoff can be replicated us-
ing three European-style options on the
underlying (for more details, see chart).
on the upside:
long on two call options at the initial
level of the s&P 500 and short on two call
options at the level of the cap.
on the downside:
short on one put option at the level
where the buffers protection ceases.
investors in the
note are exposed to
three different risks.
(1) Market (un-
derlying asset):
Performance of the
note depends on the
s&P 500s returns
and volatility. on the
upside, the perfor-
mance resembles a
bullish call spread
strategy. on the downside, investor
participation beyond a 10 percent drop
simulates a short naked put option. this
is dangerous; a significant portion of the
HSBC uses leverage and Cap for Note tied to the S&P 500
deCoNStRuCtiNg tHe deal ANAlysis By ChANdrA KhANdriKA, dEriVAtiVEs PriCiNG sPECiAlist
-80
-60
-40
-20
0
20
40
60
567 767 967 1,167 1,367 1,567 1,767 1,967
R
e
t
u
r
n

(
%
)

Level of S&P 500
Underlying (S&P 500)
Note
Source: Bloomberg LP
Payout Profile of HSBC Note
10% buffer
protects on
losses.
2x leverage
boosts gains.
12.5% cap limits
returns.
For technical breakdown of
note, click into circles,
starting here:
Interactive features
not viewable on IOS
devices.
THe noTe
Bloomberg id: rd0650138
Asset class: Equity
Principal protected: No
issuer: hsBC UsA inc. (a unit of hsBC
holdings Plc)
Underlying: s&P 500 (sPX)
Maturity: 18 months
Upside participation: 200% (12.5% cap)
downside participation: 100% (10% buffer)
trade date: April 2, 2012
value of the note
date 4/2/12 4/30/12 5/31/12 6/29/12 7/31/12
Spot Price (S&P 500) 1,419.04 1,397.91 1,310.33 1,362.16 1,379.32
Embedded Derivative Value -$6.92 -$15.43 -$54.22 -$25.02 -$16.04
Model Price $993.08 $984.57 $945.78 $974.98 $983.96
Credit Adjusted Discount Factor 0.9661 0.9706 0.9771 0.9806 0.9844
Model Price (Credit Adjusted) $959.41 $955.60 $924.09 $956.03 $968.61
External Price source (FTID) $973.70 $925.90 $952.10 $963.00
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes 5
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