Product Overview

Instrument Name: 10% KRW Yield Autocallable Note (Structured Certificate)

Underlying Asset: KOSPI 200 Index (South Korea’s blue-chip equity index)

Maturity: 3 years (36 months)

Capital Protection: Contingent protection (capital-at-risk) – full principal repaid only if the underlying does not breach a specified barrier level. Principal is at risk if the barrier is breached.

Payoff Structure: Autocallable step-down note with fixed coupons targeting ~10% per annum. Features autocall redemption on periodic observation dates if conditions are met, and a downside barrier for conditional principal protection.

Target Investors: Moderate-to-high risk tolerance investors – Experienced retail or mass affluent investors and HNWIs who seek high yield and understand equity risk. Not suitable for conservative investors requiring full principal guarantee.

This structured certificate offers an attractive ~10% annual yield in KRW by combining a fixed coupon with equity-linked performance. Below we detail each component (Underlying, Maturity, Capital Protection, Payoff, Investor Profile), followed by an explanation of product mechanics, risk/return trade-offs, and scenario analyses. All features are designed with realism and South Korean market practices in mind, ensuring suitability in the local financial and regulatory environment.

1. Underlying Asset or Index: KOSPI 200 Index

We choose the KOSPI 200 index as the underlying asset for this structured note, given its relevance and stability in the Korean market. The KOSPI 200 is a market-cap weighted index of 200 leading Korean stocks, broadly representing Korea’s equity market. Key reasons for this choice include:

• Investor Familiarity: KOSPI 200 is a well-known domestic benchmark. Korean investors are comfortable with this index’s behavior and it’s widely followed, unlike more obscure or illiquid indices. Using a familiar, liquid underlying helps investors understand the product’s risk. (By contrast, recent mis-selling issues involved products linked to unfamiliar indices like HSCEI, which many investors and even RMs didn’t fully understand .)

• Market Stability: As a diversified equity index, KOSPI 200 offers relatively stable performance compared to single stocks. Structured products on broad indices have historically “hardly incur losses and achieve sound returns,” making them mainstream in Korea . An index reduces idiosyncratic risk – no single company can disproportionately tank the payoff.

• Yield vs. Volatility Balance: KOSPI 200 exhibits moderate volatility, enabling a generous coupon. It’s volatile enough to price a ~10% yield through options, yet not as wildly volatile as some foreign indices or single stocks. For example, Korean ELS products have shifted toward local and global indices (KOSPI 200, S&P 500, Euro Stoxx 50, etc.) after single-stock ELS incurred heavy losses in the financial crisis . The KOSPI 200’s performance has historically been strong except during major crises, aligning with investor expectations for steady or growing markets.

• Local Market Suitability: Tailoring to the South Korean market means using a locally relevant underlying. The KOSPI 200 has in fact become one of the “new favorite” underlyings among local retail investors in 2023-2024 , especially as confidence in overseas-index-linked products (like HSCEI) waned. This choice aligns with current investor preference and regulatory comfort (KOSPI 200 is transparent and regulated domestically).

Alternative Considerations: We considered other underlyings such as USD/KRW exchange rate or interest rates for yield-enhancement structures. While FX or rate-linked notes (DLS) can also generate high coupons, they have led to complex risks in the past (e.g. 2019 losses on rate-linked DLS ). A basket of equities or indices (e.g. worst-of basket including KOSPI 200, S&P 500, Euro Stoxx 50) is another common approach to boost yield , but it adds complexity and correlation risk. For realism and simplicity, a single KOSPI 200 index underlying strikes a balance – it’s transparent, liquid, and suitable for Korean investors, while still allowing a ~10% coupon through an appropriate payoff structure.

2. Maturity: 3-Year Term

Recommended Maturity: 3 years (with potential autocall redemption before final maturity). This medium-term tenor is chosen considering market volatility, product design, and investor appetite:

• Typical Structure Tenor: In South Korea, the average term for autocallable structured products is around 3 years . This has become a market norm – providing enough time for the underlying to perform, and aligning with issuer structuring practices. By contrast, markets like Hong Kong favor very short tenors (~6 months) for similar products , but Korean issuers and investors have historically accepted longer exposure for higher yield.

• Balance of Yield and Risk: A 3-year term allows the product to offer a higher coupon (10% p.a.) than a 1-year note could. Longer maturity gives the embedded options more time value, enabling richer coupons. It also provides more observation dates for autocall events (e.g. semiannual or annual call chances), increasing the likelihood the note will redeem early and deliver the targeted yield.

• Recovery Window: Market volatility in the short term can be sharp, so a multi-year horizon grants the underlying index time to recover from any temporary downturns. If the KOSPI 200 dips in year 1 due to volatility, a 3-year structure still has later observation dates or final maturity by which the index could rebound above the trigger/barrier levels. This reduces the chance of principal loss compared to a very short maturity that might otherwise force a loss realization at a market low. (For example, the HSCEI-linked products in Korea had 3-year maturities, which did amplify risk of a downturn, but also would have allowed recovery if the index rebounded – unfortunately HSCEI kept declining . With KOSPI 200’s historically more mean-reverting behavior, 3 years is a reasonable window.)

• Investor Appetite: Korean investors are generally willing to lock in funds for a few years in exchange for higher returns, as seen by the popularity of 3-year equity-linked securities. It matches the tenor of many retail structured deposits and notes. Shorter maturities (1 year or less) are usually seen in simpler, lower-yield structures or in other markets; for the 10% yield target, a one-year note would either need extremely risky terms or might not achieve the payout. Conversely, going much beyond 3 years (e.g. 5+ years) would introduce too much uncertainty and reduce appeal for retail investors who typically prefer a medium-term horizon.

Maturity Structure: The note will have periodic observation dates (e.g. quarterly or semiannual) at which an autocall can occur (details below). If an autocall is triggered, the note will redeem early, shortening the effective investment period. However, if no autocall event occurs, the final maturity is 3 years, at which point the remaining payoff (principal and any final coupon) is determined. This design provides flexibility – it can end early if conditions are favorable, or run the full term if needed.

Regulatory Note: The 3-year tenor is standard but regulators have noted that longer exposure can amplify risk if the underlying suffers a sustained downturn . We mitigate this by choosing a robust underlying and incorporating protection barriers. Additionally, we will ensure clear disclosure that investors must be willing to hold for the full term and face interim market swings.

3. Capital Protection: Contingent, Not Fully Guaranteed

This product is capital-at-risk, offering contingent capital protection through a downside barrier. It is not a fully principal-protected instrument, because achieving a 10% annual yield requires the investor to take on some market risk beyond risk-free rates. We considered three levels of protection:

• Full Principal Protection (0% at-risk): Not chosen. Fully capital-guaranteed notes (often called ELBs in Korea) invest most of the capital in a bond and use the remainder for options, which significantly limits coupon potential in a low-rate environment. In 2024’s interest rate environment (BOK base rate ~2.5-3%), a fully protected KRW note could not reliably pay an unconditional 10% coupon – the option budget would be too small. While Korea saw a rise in principal-protected ELS issuance recently thanks to higher rates, those products still offer relatively lower yields than 10% or make the high yield very conditional . For our 10% target, full protection is impractical.

• Partial Protection (e.g. 90% principal protected): Possible but not chosen. Partially protected structures guarantee a portion (say 90-95%) of principal at maturity, exposing only the remainder to risk. This could be achieved via a constant proportion portfolio insurance (CPPI) or bond+option mix . However, partial protection further constrains coupon or requires complex dynamic strategies. The South Korean market predominantly issues either fully protected or fully at-risk notes, with few in-between. Thus, a partial guarantee might complicate investor understanding and still might not afford a full 10% coupon without significant conditions.

• Contingent Protection (Capital-at-Risk with Barrier): Chosen approach. The note provides principal protection only if the underlying’s decline is not too severe, via a barrier mechanism. At maturity, if the KOSPI 200’s final level is above a pre-set barrier (e.g. 50% of its initial level), the investor’s principal is fully repaid. If the index finishes below the barrier, the protection falls away and the investor incurs a loss proportional to the index decline (this essentially puts principal at risk beyond the barrier threshold). This structure is standard in yield-enhancing notes – over 85% of Korean structured products have no full capital protection , but many include such contingent barriers for partial safety. In our design we incorporate a 50% downside barrier, meaning the investor’s capital is safe as long as the index does not drop more than 50% at maturity. A 50% barrier (a common “knock-in” level in Korean ELS ) offers a cushion against normal market volatility, only exposing investors to loss in extreme bear scenarios.

Rationale: This contingent approach aligns with the risk/return goal: it entices investors with high coupons in exchange for taking on conditional downside risk. If markets don’t crash, investors get full principal plus yield; if a crash does occur, they will bear losses akin to equity exposure. It’s a transparent trade-off often described to investors as “principal protected unless the market falls by more than X%.” The 50% threshold is deliberately set low (a large drop) to make the chance of loss remote – historically, the KOSPI 200 has rarely fallen by >50% over a 3-year span except during major crises. This level of protection helps make the 10% yield psychologically palatable to investors (they feel protected against moderate downturns), while still allowing the issuer to price a high coupon because in a tail-risk scenario the investor, not the issuer, absorbs the loss.

Mechanics of Barrier: The barrier is observed at the final valuation date (maturity) – i.e., it’s a European-style barrier at maturity. (No continuous monitoring that could knock the protection out intraperiod; only the final index level vs. barrier matters for principal outcome.) This means even if the index dips below 50% during the term, what matters is where it ends at maturity. This feature gives the index time to potentially recover above 50% by maturity, preserving principal – a design that favors the investor to some extent. However, if at maturity the index is below 50% of its start level, contingent protection is lost and the investor will receive the index performance applied to principal (e.g. if index fell to 40% of initial, investor gets only 40% of principal, implying a 60% loss). This is the “knock-in” outcome common to many autocallable and reverse convertible notes  .

Note: By taking this structure, investors are effectively selling insurance against a deep market crash. They must understand that capital is at risk if that crash barrier is breached. This is disclosed clearly, and the product is not marketed as a “guaranteed principal” investment. The prevalence of contingent (non-principal-protected) ELS in Korea shows investor acceptance of such risk for higher yield, although recent trends show more caution after some investors suffered losses in non-protected notes linked to volatile indices . Our choice of a local, broad index and a conservative 50% barrier is meant to mitigate risk within this capital-at-risk framework.

4. Payoff Structure: Autocallable Step-Down Note (with Fixed Coupon & Barrier)

To achieve the 10% annual yield target, we select an autocallable payoff structure – a popular “step-down ELS” style structure in Korea . The product combines fixed high coupons with the possibility of early redemption (autocall) and the contingent protection barrier described above. Key features of the payoff mechanism include:

• Fixed Coupon Rate: The note pays a fixed coupon of 10% per annum (in KRW), paid proportionally on observation dates when conditions are met. Typically, coupons accrue and are paid upon an autocall event or at maturity. For example, if quarterly observation dates are used, the coupon could accrue at 2.5% per quarter (10% annualized) and be paid out when the note autocalls or at maturity. The coupon is conditional on not having been paid out earlier via autocall, but often structured notes use a “memory coupon” feature – meaning even if an autocall was missed, the coupon accumulates and eventually is paid if the note ever calls or matures above barrier. This ensures investors realize the full intended yield if conditions are eventually met.

• Autocall Trigger (Early Redemption): Starting after an initial lock-up period (e.g. first observation at 6 months), the note has periodic autocall observation dates (say every 6 months). On each date, if the KOSPI 200 index is at or above a specified Autocall Level, the note will automatically redeem early. The investor receives back their full principal plus the accrued coupon for the period (yielding ~10% p.a. prorated to the holding period). The autocall level can be set at or slightly below the initial index level, often with a step-down feature: for instance, the trigger might be 100% of initial at the first year, 95% at the second year, 90% at final, etc. This step-down autocall structure increases the chances of calling as time passes (the required threshold for the index gets lower). Such step-down autocalls are the norm in Korean ELS, as they improve the likelihood of early exit with full coupon .

• Example: Autocall Levels: 100% of initial at Year 1, 95% at Year 2, 90% at Year 3 (final maturity). If on the first anniversary the KOSPI 200 is at or above 100% of its initial level, the note autocalls — investor receives principal + 10% coupon and the product terminates a year early (which equates to a 10% return for 1 year). If not, it continues to Year 2, where now only 95% of initial is needed to trigger the call, etc. Early redemption limits upside (the trade-off: if the market rallies strongly, the note will likely call and cap the investor’s profit at the coupon, rather than allowing unlimited upside participation – this is how the high coupon is financed).

• Downside Barrier & Principal Redemption: If the note never autocalls during the 3-year term, then at maturity it pays out based on the downside barrier outcome:

• If final index level ≥ Barrier (50% of initial): The investor receives full principal repayment plus the final period’s coupon (and any accumulated coupons not yet paid). In other words, as long as the KOSPI 200 is above 50% of its initial level at maturity, the investor is made whole on principal and still gets the yield. This scenario includes moderate drops — e.g. if the index is down 20% or 30% from initial, principal is still fully paid due to barrier protection (the coupons provide the yield, though if the note didn’t autocall earlier, some structures might still pay accumulated coupons at maturity assuming a “memory” effect or a final conditional coupon).

• If final index level < Barrier (below 50% of initial): The contingent protection fails – the investor’s principal is exposed to the index performance. The payoff in this case is typically principal × (Final Index Level / Initial Index Level), meaning the investor suffers the same percentage loss as the index. For example, if the KOSPI 200 fell to 40% of its start value, the investor gets only 40% of their principal back (60% loss) . Any unpaid coupons are typically forfeited as well in this worst-case scenario (since those coupons were conditional on not breaching the barrier). Effectively, the investor ends up bearing a heavy loss, similar to if they had held the index outright through a crash. This is the downside risk that justifies the high coupons in other scenarios.

• No Knock-In Until Maturity: Our structure uses maturity-only barrier assessment (no interim knock-in event). Some autocallables incorporate continuous or intra-period barriers that if breached would lock in a loss condition even if the market later recovers. We opted for only a final observation barrier to give maximum chance for recovery, enhancing investor protection. (Regulatory trends in Korea have shown a preference for simpler structures – indeed sales of structures “without knock-in” have been dominant , meaning many products only assess final levels for principal protection, exactly as we do.) This way, short-lived deep dips won’t automatically penalize the investor unless the index is still down severely at maturity.

• Payoff Summary: In essence, this is an Autocallable Barrier Note on the KOSPI 200. It pays a high fixed coupon (~10% p.a.) as long as the underlying doesn’t crash. If the underlying performs moderately or well, the note will likely autocall early (investor gets 10% (annualized) yield and principal back). If the underlying stagnates or declines slowly, the note may run full term, but as long as it’s not down >50% at maturity the investor still gets all principal plus coupons. Only in a severe bear scenario (>50% decline) does the investor take a loss, proportionate to the index fall.

This payoff structure is chosen because it is proven and popular in South Korea for delivering enhanced yield. The vast majority of Korean structured retail products are autocallables with similar features . Investors are accustomed to the step-down autocall mechanism and “worst-case” barrier concept. By targeting a 10% coupon, we set terms (like barrier level and basket choice) to price that yield. For example, many Korean ELS in recent years offered ~5-8% coupons with 50% barriers on global index baskets; using a single domestic index might yield slightly less, but since we aim for 10%, the structure could be tweaked (perhaps slightly longer observation intervals or adding a secondary index) to hit that rate. It’s feasible given the current volatility and interest rate inputs for KOSPI 200. The fixed coupon, regardless of index upside beyond autocall trigger, caters to investors seeking income rather than unlimited equity upside. It essentially monetizes moderate equity performance into a high coupon.

Comparable Structures: This design is akin to the typical “step-down ELS” widely issued in Korea , with the difference that we use a single index underlying for clarity. Often, Korean autocall notes use a basket of 2-3 indices (worst-of) to achieve higher coupons . For instance, a note referencing KOSPI 200, S&P 500, and Euro Stoxx 50 (payoff based on the worst performer) could easily support a >10% coupon due to higher risk. We opted for a simpler single-index structure for transparency – but if yield needed a boost, using a worst-of basket is a common tweak (investors should then understand that their payoff depends on the worst index’s fate).

5. Target Investor Profile

Intended Investors: This structured certificate is best suited for retail or high-net-worth investors with a moderate to high risk tolerance who are seeking enhanced yield in a low-rate environment and who understand the product’s mechanics and risks. It may also appeal to some institutional or corporate investors for yield enhancement, but typically the structure and denomination (KRW, retail sizing) are tailored to individuals or wealth management clients. We outline the profile and suitability considerations:

• Retail Investors (Experienced): The product is designed for South Korean retail investors who have prior investment experience beyond deposits – for example, those who have invested in equity funds, bonds, or previous ELS/ELB products. In Korea, the structured product market has historically been retail-driven , and autocallable equity-linked securities are common offerings at banks and securities firms. This note would attract retail investors disappointed with low deposit rates and looking for ~10% returns, provided they have the capacity to bear potential loss of principal. Suitable retail investors should not be those needing capital guarantees (e.g. retirees fully dependent on savings) – rather, it’s for those willing to take equity market risk. Regulatory guidance after recent mis-selling incidents emphasizes matching product risk with the client’s risk appetite . Therefore, only retail investors who comfortably fall in a medium-to-high risk category (as assessed by the distributor’s suitability test) should be offered this note. They should ideally have an understanding that they are effectively selling a put option (taking on downside risk beyond 50% drop) in exchange for income . In practice, many Korean retail investors do buy such products, but we would implement robust disclosures to avoid the misconception that this is a “fixed income” or principal-guaranteed investment .

• High-Net-Worth Individuals (HNWIs): HNW and affluent investors are a key target segment. They often seek higher yields and are familiar with structured products offered by private banks. HNWIs typically can accept the risk of principal loss in a worst-case scenario as a portion of a diversified portfolio. For them, a 10% KRW yield note can be an attractive alternative to direct equity investing or high-yield bonds, with conditional protection. Moreover, after Hong Kong’s tightening, many sophisticated products are now restricted to savvy investors  – we anticipate a similar approach in Korea, meaning HNW investors who presumably have access to financial advisors and can understand complex payoffs are appropriate buyers. This note could be positioned as a yield-enhancement tool for HNW portfolios, falling under the “yield enhancement” or “alternative income” allocation.

• Institutional Investors: Generally, large institutions (asset managers, insurance companies, pension funds) are not the primary target for this retail-oriented certificate. Institutions seeking 10% yields have other avenues (e.g. high-yield corporate bonds, leveraged strategies) and also might prefer tailor-made OTC derivatives rather than a packaged note with retail terms. However, smaller institutions or corporate treasuries with KRW holdings might find it appealing if it fits their risk policy. The structure could be offered in private placements to such entities, but we assume the main distribution is through retail channels (bank branches, securities companies).

Exclusions: Investors with low risk tolerance or need for capital preservation (e.g. retirees relying on savings, or anyone who cannot afford a significant loss) should not be in this product. Recent findings by Korea’s FSS showed instances of inappropriate sales of complex ELS to such individuals (including those “prioritizing principal protection” or with critical short-term cash needs) . Our distribution will strictly avoid repeating those mistakes by ensuring thorough suitability screening and informed consent (leveraging regulations like mandatory audio-recording of sales for complex products  and providing a cooling-off period for reflection).

Regulatory Compliance: Under the Financial Investment Services and Capital Markets Act (and subsequent guidelines), this product would likely be classified as a derivatives-linked security. Given its complexity, it may fall under the “complex/high-risk product” category introduced after 2019’s DLS incident . As such, it will be sold with enhanced investor protection measures: clear risk disclosures, scenario analyses provided, and possibly limits on how much a single retail client can invest relative to their net worth (to prevent over-concentration). The target investor profile definition above aligns with the need to match the product to the right investors – those who can appreciate the 10% yield potential and bear the risks involved .

Mechanics and Payoff Explanation

To illustrate how the structured certificate works, here is a step-by-step breakdown of its mechanics and cash flows:

1. Issuance and Investment: On the issue date, investors purchase the note at par (100% of face value) in KRW. The issuer (a bank or securities firm) uses the proceeds to structure the payoff – typically by investing in a bond or deposit for contingent protection and entering into derivative contracts (options) on the KOSPI 200 to generate the coupon and payoff profile. The note is registered with the FSS and assigned an ISIN as a security. Investors should be aware of the issuer’s credit (if the issuer defaults, investors face credit risk in addition to market risk).

2. Autocall Observation Dates: The note has predefined observation dates, e.g. every 6 months from issuance (6M, 12M, 18M, 24M, 30M) and the final maturity at 36M. On each observation date if the KOSPI 200 index closing level is at or above the Autocall Trigger level, the note will automatically redeem (autocall). The Autocall Trigger starts at 100% of initial index and steps down over time (for example: 100% at 6M, 100% at 12M, 95% at 18M, 90% at 24M, 85% at 30M, and 80% at 36M final – actual levels can be calibrated).

• If an autocall is triggered on an observation date, the note immediately terminates and pays the investor: 100% of principal + accrued coupon for the period. For instance, if at 12 months the index ≥ 100% initial, investor gets principal + 10% (for one year). If at 18 months the index ≥ 95% initial (trigger), they get principal + 1.5 years’ worth of coupon (15%). Autocall payment is typically made within a few business days after the observation date. Investors thus lock in the high yield and can reinvest elsewhere after exit.

• If the autocall condition is not met, the note continues to the next observation date, with coupon accrual continuing. No coupon is paid out at those interim dates unless an autocall happens (unless a structure has periodic coupon regardless – our design assumes no periodic payout unless called, which is common in autocalls, but some variants have “conditional coupons” paid regularly if conditions meet even without calling – that could be an alternative design).

3. Final Maturity Date Outcome: If none of the earlier autocall dates resulted in redemption, the note reaches maturity (36 months). At this point, two things are evaluated: (a) the final coupon condition for payoff, and (b) the barrier condition for principal.

• First, if the note is still alive at maturity, often a final coupon is payable if the index is above a certain level (which usually is the same as the barrier or possibly higher). In our design, we can simplistically say the final coupon of 10% for the last year is due if the index is at least above the barrier (since barrier is quite low at 50%, effectively if the barrier is not breached the coupon is paid as part of full redemption). Some structures include a condition like “if final index ≥ 80% of initial, pay last coupon; if below, no coupon” – but we prefer a memory coupon style where as long as the investor doesn’t lose principal, they receive the full accumulated coupons. So assume the investor will receive the full 30% total coupons for 3 years if the barrier isn’t breached by maturity (minus anything already paid if an autocall had occurred, which it didn’t in this scenario).

• Second, the 50% barrier is checked against the final index level:

• If Final KOSPI 200 ≥ 50% of Initial, the barrier holds. The investor receives 100% of principal (plus the final coupon as noted). Thus, even if the index is moderately down (say 70% of initial, i.e. –30%), the investor is made whole on principal – the high coupons essentially compensate for the index dip (investor still gets positive return overall thanks to coupons). This is the contingent protection in effect.

• If Final KOSPI 200 < 50% of Initial, the barrier is breached. The note does not offer protection. The principal repayment is reduced in line with the index performance: investor receives Principal × (Final Index/Initial Index). Essentially, the investor takes the full loss beyond that point. For example, final index at 40% of initial -> investor gets 40% of their principal (a 60% loss). Any coupon that would have been earned in the final period is typically not paid (because the structure may state that no coupon is paid if barrier fails – though some structures still pay coupons up to the last observation before maturity). In sum, the investor shares the fate of the equity market in a crash scenario.

4. Payout Summary Table: (assuming KRW 100 million principal for illustration)

Scenario Outcome

Early Autocall Triggered (e.g. at 1 year) Note redeems early. Investor receives principal (100m) + 10% coupon (10m) = KRW 110m total. Investment ends. (If triggered later, say 2 years, payout would be 100m + 20m = 120m, etc.)

No Autocall by maturity, Index above Barrier (e.g. Final index is 80% of initial) Investor receives full principal 100m + all accrued coupons (30% total over 3 years = 30m) = KRW 130m. Despite the index being 20% down, investor gains 30m from coupons, netting a positive return. Principal is unharmed because index stayed above 50% barrier.

No Autocall, Index below Barrier (e.g. Final index is 40% of initial) Barrier breached. Investor receives principal * index performance = 100m * 0.40 = KRW 40m. (60m loss of principal). All coupons are forfeited in this worst case. The investor suffers a significant loss, similar to holding the index which fell 60%.

5. Issuer Call Risk: It’s worth noting the issuer has no discretion to call the note outside the preset autocall conditions – it’s an automatic formula-driven redemption. So unlike a callable bond where the issuer might choose to call when it’s favorable for them, here the redemption is determined by market levels (favorable to both parties as structured). If the index is very high (well above triggers), the note will inevitably autocall at the next date (this benefits the issuer as they stop paying coupon beyond that, and investor gets their money sooner but foregoes further coupons). If the index is low, the note continues (investor still has chance for recovery, issuer continues to owe coupons). The structure thus balances risks for both sides.

6. Secondary Market: Although designed to be held to maturity or autocall, the note could potentially be sold in the secondary market before maturity. However, liquidity can be limited, and market value will fluctuate based on the underlying index level, time to maturity, and remaining coupon potential. If the KOSPI 200 drops significantly early on (approaching the barrier), the note’s market price would fall (as probability of full payout decreases). Conversely, if the index rises well above triggers, the note will be valued near par plus accrued coupon as an autocall is likely. Investors should be prepared to hold to maturity, but the option of selling exists if one needs to exit (subject to market pricing and possibly wide bid-ask spreads).

Through these mechanics, the product aims to deliver the promised ~10% annual yield in most scenarios, with the trade-off that in a severe market crash scenario the investor participates in losses. The fixed structured nature means the investor does not directly receive dividends from the index (if any) nor additional upside beyond the fixed coupon – those factors are priced into the generous coupon.

Risk/Return Trade-offs

Every structured product entails a balance of risk and reward. This 10% KRW Yield Certificate offers high potential returns, but investors must carefully weigh the risks in the context of their portfolio and the market outlook:

• Attractive Yield (Reward): The headline benefit is the 10% per annum coupon, far higher than typical deposit rates or government bonds in Korea (~2-3% base rate) . In a stable or moderately rising market scenario, the investor can earn double-digit returns which is a strong yield enhancement for a KRW investment. Even if the underlying index only moves sideways or slightly down, the structured payoff can still deliver the coupon and protect principal (assuming no barrier breach). This makes it appealing for yield-seeking investors in a low-yield world – essentially turning a mild equity exposure into an income stream.

• Conditional Principal Protection: The inclusion of the 50% barrier provides a sense of safety for moderate market moves. The investor is protected against losses for declines up to 50%, which covers most regular bear markets. For context, a 50% drop is an extreme event (e.g., global financial crisis levels). Thus, under most foreseeable scenarios (normal volatility, typical corrections), the investor’s principal is safe and they still get their income. This contingent protection differentiates the product from a direct equity investment – there’s a built-in buffer zone. It also addresses part of investors’ capital preservation desire, which is critical in gaining comfort to invest. That said, it’s not full protection, so risk remains.

• Equity Market Risk: The primary risk is market downturn risk. If the KOSPI 200 crashes deeply (beyond the barrier), the investor can lose a substantial portion of capital. Essentially, in the worst case they are in a similar position as if they held the index and it halved (minus any small coupon benefit they might have gotten earlier). Investors must not underestimate this tail risk; while unlikely, it can happen (e.g., 2008 crisis saw global indices fall over 50%). The product’s high yield is essentially the compensation for bearing this downside risk. We explicitly highlight that by purchasing this note, investors are short a put option – they have sold protection against a crash to the issuer. They earn premium (the coupon) for that, but pay out if the crash occurs . If an investor is not comfortable with potentially significant losses tied to equity performance, they should not invest.

• Limited Upside vs Direct Equity: Another trade-off is that the investor’s upside is capped at the coupon. If the KOSPI 200 rallies strongly (say +30% in a year), a direct equity investor would benefit fully, but our note would simply autocall and return a 10% yield for that year, missing out on the extra upside. Therefore, this product is for investors who prioritize steady income over high growth. In exchange for giving up equity upside beyond 10-10.5% annually, the investor gets the cushion of the barrier on the downside. It’s a classic yield enhancement at the cost of capped upside strategy. For many income-oriented investors, this is acceptable; however, those who are bullish on equities and want full upside participation might not favor this structure.

• Autocall and Reinvestment Risk: If the note autocalls early (which is quite possible if the market is flat or up even modestly, given step-down triggers), the investor will have their money returned sooner than expected – then facing reinvestment risk. They must find a new investment potentially in a lower interest rate environment or when alternative yields might be less attractive. Early call means you cannot keep earning 10% for the full 3 years; you might get only 1 coupon and then need to redeploy capital. This reinvestment risk is something to consider: the best market scenario (sharp rise) ironically causes the product to end quickly. We mitigate this by the step-down triggers (ensuring even moderate performance triggers autocall only gradually), but nonetheless, many autocallables tend to redeem well before final maturity in benign markets.

• Issuer Credit Risk: As a structured note, this certificate is an obligation of the issuer (typically a bank or securities company). There is credit risk – if the issuer defaults (bankruptcy), investors could lose money regardless of underlying performance. The product is not covered by deposit insurance. Thus, investors should consider the issuer’s creditworthiness. In Korea, large securities firms or banks issue ELS; they are generally stable, but it’s a factor to note. In our term sheet, we would specify the issuer’s name and credit rating. The high yield partly also reflects taking on this credit risk (though for top issuers it’s small). Institutional or savvy investors may hedge this by diversifying issuers or demanding higher returns for lower-rated issuers.

• Liquidity and Valuation Risk: While not meant to be traded daily, if an investor needed to sell before maturity, the price they get could be less than face value, especially if the underlying index is down. The note’s valuation is mark-to-market and can swing with the KOSPI 200 and interest rates. During market stress, liquidity can dry up and bid/ask spreads widen. In March 2020, for example, many structured notes saw their secondary market prices plunge as underlying indices fell and hedging costs rose, even if eventually they recovered. So an investor should be prepared for mark-to-market volatility. There’s also risk that in extreme volatility, the issuer’s hedging could be challenged (though that’s more a risk to the issuer, investors mainly face the outcomes defined by the payoff).

• Complexity Risk: Although we have aimed to explain the structure clearly, it is inherently more complex than a straight bond or stock investment. Some investors might not fully grasp all scenario outcomes (e.g., the conditional nature of coupons or how barrier works). Complexity itself can be a risk if it leads to misunderstanding. That’s why investor education and regulatory safeguards are crucial. Products like these have sometimes been misperceived as “fixed income-like” when they are not – which can lead to unpleasant surprises. We mitigate this by transparent documentation, showing scenario analysis in the term sheet, and ensuring advisors convey the risks (including that if the market falls 51%, you can lose almost half your money – this is possible even if it seems unlikely).

In summary, the product offers a high-income, moderately protected strategy: investors gain a significant yield pickup and partial downside protection, in exchange for taking on extreme downside risk and giving up extreme upside potential. The risk/return profile should be evaluated against the investor’s market view – if one believes the KOSPI 200 will be range-bound or modestly up over the next 1-3 years, this product likely will deliver superior returns to direct equity or fixed income. If one fears a major crash or conversely expects a huge rally, the product is less ideal (either you’d incur loss in the crash or miss gains in the rally). It is crucial that the 10% yield not lure investors without them appreciating the contingent nature of principal protection.

Potential Market Scenarios and Outcomes

To further clarify how the structured certificate performs, we consider several hypothetical market scenarios for the KOSPI 200 over the investment period. These scenarios illustrate the range of outcomes, from favorable to adverse:

• Scenario 1: Steady Moderate Rise (“Best Case” for investor)

Market Assumption: KOSPI 200 rises gradually and stays at or above its initial level in the coming year. For instance, by the first annual observation, the index is 5% above the initial.

Outcome: Autocall at 1 Year. On the first autocall date (12 months), the index (105% of initial) exceeds the 100% autocall trigger. The note redeems early. The investor receives 100% principal + 10% coupon for one year. Total payout = 110% of invested amount in 1 year. This is an effective annual yield of 10%.

Investor Experience: They achieved the target return quickly. They can now reinvest for year 2 and 3 elsewhere. They did miss out on any further upside beyond 10% (had they held stocks, they’d be up 5% plus dividends), but they locked in a solid double-digit profit with principal protected. This is a very positive outcome, essentially the investor’s ideal scenario (market was stable/up and they got out early with full yield).

• Scenario 2: Range-Bound, Slightly Down Market (“Base Case” perhaps)

Market Assumption: KOSPI 200 fluctuates around the initial level for 3 years, never rising enough to trigger early call at first, but also not crashing. For example: at 6M, index is 95% of initial (no call, since trigger was 100%). At 12M, it’s 98% (still below 100% trigger, no call). At 18M, trigger reduces to 95% and index is 90% (no call). At 24M, trigger 90%, index 92% – now above trigger? Actually 92% is above 90% trigger at 24M, so actually an autocall would happen here. But let’s tweak: assume it hovers just below each trigger – say at 24M index 88% (below 90% trigger). At 30M, trigger 85%, index 80% (no call). At final 36M, trigger 80% final check (though at final, trigger is irrelevant, we then use barrier), index perhaps recovers a bit to 70% of initial.

Outcome: No Autocall, Matures Normally – Principal Protected. In this path, no autocall ever happened because the index never met the required level on observation dates. At maturity, the KOSPI 200 is at 70% of initial, which is above the 50% barrier. Thus, despite being 30% down from the start, the investor is protected. They receive 100% principal back. Additionally, the accumulated coupons for 3 years are paid (depending on structure specifics – likely yes, since at maturity index is above barrier, all coupons due are paid). That would be 30% total coupon paid at maturity. So the investor gets 130% of their original investment back after 3 years. This equates to an annualized return of about 9.14% (since compounding isn’t exactly linear, but roughly the promised 10% minus a bit because coupons came at the end rather than yearly).

Investor Experience: The index basically went down 30%, which would have been a loss if they held stocks, but the structured note still delivered a strong positive return (~+30% in total) thanks to coupons and barrier protection. This showcases the benefit of the structure in a flat or mildly bearish market – the investor wins despite the market being down. They effectively beat the market by a large margin (because they sold off upside to get yield and were shielded on downside up to 50%). The only drawback was having to wait full 3 years for payoff since no early call; but they did realize the full intended yield. The investor is likely satisfied: they capitalized on the range-bound market by earning income.

• Scenario 3: Bull Market (“Missed Upside” Case)

Market Assumption: KOSPI 200 rallies strongly, say +25% in year 1 and keeps rising.

Outcome: Autocall at first observation (Year 1). As soon as 6M or 12M, the index is way above trigger. Let’s say at 6 months it’s already 110% of initial; trigger was 100%, so it autocalls at 6M (or definitely by 12M). The investor gets back principal + ~5% (if 6M) or +10% (if 12M) coupon. After that, they are out of the market.

Investor Experience: This is still a profitable outcome (no loss, got good yield for the period held). However, in hindsight, the investor might feel a bit of “opportunity cost” – the market soared 25% in the year, but they only earned 10%. After autocall, they have cash but the market is now higher; any new investment may be at higher entry levels or lower yields. Essentially, in a roaring bull market, the structured note underperforms a direct equity investment. The investor traded away upside for the fixed coupon. This scenario underlines that the product is not intended for uber-bullish views. The investor should be content with 10% and not regret missing further gains (this psychological aspect should be clarified at sale – if you strongly think the market will boom, maybe buy equities instead). Nonetheless, making +10% with principal safety in half a year is objectively a good absolute outcome – the only “risk” here was reinvestment risk and missed upside. Many income-focused investors would still be happy to take the 10% and not worry about timing the top.

• Scenario 4: Slow Bleed Bear (“Stress Case, but within protection”)

Market Assumption: A bear market where KOSPI 200 slides gradually each year, never recovering or triggering autocall, but does not crash below 50%. For example: Year 1 end at 90% of initial (no call, trigger 100%), Year 2 end at 70% (trigger would have stepped down to ~95%/90% but index still below, no call), Year 3 end at 55% of initial.

Outcome: Matures without call – Barely Above Barrier. At final maturity, the index is at 55% of initial – which is above our 50% barrier (just narrowly). Therefore, despite a 45% drop in the index over 3 years, the investor is still protected. They receive full principal and all coupons. Total payout = 130% (principal + 30% coupons). Annualized ~9.14% return.

Investor Experience: This is almost a miracle outcome for the investor – the market was deeply bearish (nearly halved over the period), yet because it stayed just above 50%, the investor doesn’t lose money; in fact they gain a handsome return. In a direct equity investment, the investor would be down 45%. Here, they’re up ~30%. This underscores how powerful the structure’s protection can be in certain bear cases: as long as the floor isn’t breached at maturity, the structure can completely flip the script (turning what would have been a big loss into a gain). Of course, the risk was if the index had fallen just a bit more, below 50%, then the outcome would change dramatically (see next scenario). So this scenario is a close shave – it shows the cliff-edge nature around the barrier. It’s great if the final level is 51%, but terrible if it’s 49%. Investors need to understand that non-linear risk.

• Scenario 5: Deep Crash (“Worst Case”)

Market Assumption: A global crisis hits – the KOSPI 200 plunges by 55% in the first year (e.g., similar to early 2020 COVID shock or a hypothetical severe event), and does not fully recover. By maturity it’s still say 50% down (or even worse). For concreteness, assume final index level is 45% of initial.

Outcome: Barrier Breach – Capital Loss. At maturity, 45% < 50% barrier, so principal protection is lost. The investor receives only 45% of principal back. Any accrued coupon is not paid (since the structure likely cancels coupons if barrier fails; some might pay coupons up to last safe observation but let’s assume worst case none paid because final breach). The total received might be ~45% of original investment (if no coupons at all because of barrier fail). It’s a devastating ~55% loss of principal. (If the structure had some periodic memory coupon paid earlier, the investor might have gotten a small amount prior to the crash, but under a crash scenario typically even early observations would have been below triggers, so likely no coupon was ever paid out, making it a full loss scenario.)

Investor Experience: This is clearly painful. The investor faces a large capital loss, similar to having held an equity investment through a crash. The promised 10% yield did not materialize; instead, the investor’s capital eroded. This scenario highlights the tail risk: the product does not eliminate extreme downside risk, it only postpones or cushions it up to a point. In such a scenario, investors in structured notes often feel worse off because the product might have been perceived as safer than stocks, yet in a severe crash they still lost heavily. There may also be illiquidity during the crash – even if the investor wanted to cut losses early, selling the note when the index was say 45% down could have been at an even worse price due to volatility and option value, etc. The key for an investor here is that this was the trade-off from the start: the high coupons were effectively not free – they were the premium for underwriting this exact scenario. If this scenario occurs, the investor’s outcome is the flip side of having earned coupons in calmer times. Any investor considering the product must accept this worst-case possibility. Risk management could involve only investing a portion of assets in such products, to avoid crippling losses.

Summary of Scenarios: In most mild to moderate scenarios (markets flat, up or modestly down), the structured note delivers the advertised ~10% yields and protects capital, often outperforming direct equity. In extreme positive scenarios, it still gives a good absolute return but underperforms direct equity (upside capped). In the extreme negative scenario, it exposes the investor to severe losses (downside beyond the barrier). This profile should be clearly understood – the product shines in sideways markets and manages well in typical bearish dips, but in a true crash it will participate in the pain. Historically, many Korean autocallables have indeed performed in the favorable range: it’s noted that ELS on major indices “tend to hardly incur losses and achieve sound returns” in practice , because markets usually don’t breach the deep barriers. However, the rare cases like the 2020 COVID crash or the recent HSCEI collapse show that when things go wrong, they can go very wrong for these products . Investors should weigh the probability and personal impact of such tail events.

Regulators encourage that scenario analyses like the above be presented to clients, to guard against the misunderstanding that “10% yield = safe.” We have done so to ensure full transparency.

Suitability and Market Considerations (South Korea)

Designing this product for the South Korean financial environment means taking into account local regulations, market conditions, and investor behavior. A few points on why this product is realistic and suitable in Korea now:

• Regulatory Environment: South Korea’s regulators (FSS and FSC) have increased scrutiny on structured products after notable mis-selling incidents . There is now a “highly complex product” category that likely encompasses autocallable notes with certain features . These rules don’t ban such products but require stricter sales processes (e.g., advisor competency, customer risk profiling, documentation). Our product, being a relatively straightforward equity-index autocall (no exotic underlying like illiquid funds or foreign complex rates), is on the simpler end of complex products. It would be permissible to offer, but with due compliance: providing a Key Information Document (KID) or similar, explaining payoff in plain language, and ensuring the investor signs off on understanding the risk. The product is structured as a security under local law (likely issued under the Korean ELB/ELS framework, which is a well-established part of the capital market ). We will also adhere to any cap the regulator sets on sales to certain segments (for example, banks had a cap on selling ELS via trust accounts post-2019 ). Our view is that this product can be responsibly issued under current rules, given it’s similar to what is already mainstream (KOSPI 200 ELS with barrier). The key difference is making sure it’s marketed to the right people, which we have addressed in the Target Investor section. When aligning risk profiles, one consultant notes that it’s “crucial to match the product risk profile with the investor’s risk appetite”  – we fully agree and would implement that.

• Market Demand and Timing: As of 2025, interest rates in Korea, while off their lows, are not high enough to give 10% yields in safe products. Investors are still yield-hungry. Indeed, the structured product market in Korea is huge, with sales of structured notes in the trillions of KRW each year  . There’s a demonstrated demand for yield enhancement products as alternatives to low-yield deposits, which spurred growth in the ELS market over the past decade . Currently, with KOSPI relatively stable and volatility moderate, conditions are favorable to structure an attractive note. One thing to note: after the losses in HSCEI-linked ELS, Korean investors have shown preference for safer underlyings and even principal-protected products . Our product uses a safer underlying (KOSPI 200) and a conservative barrier; while it’s not principal-guaranteed, it is arguably a “safer” variant of non-protected ELS. It could thus appeal to investors coming back to the market after being spooked by the China index episode, offering them a Korean index exposure with high coupon. The fact that principal-protected ELS sales have risen recently (up 76% YoY) due to risk aversion and higher interest rates enabling yields  shows that if we could incorporate some protection, it’s a selling point. We have done so via the barrier. The 10% target yield might actually stand out, because many recent ELS payouts were in mid-single digits . By using a beloved local index and negotiating the payoff terms, we aim to hit that higher coupon, which could be very attractive marketing-wise (with the caveat of risk explained).

• Comparable Instruments: Historically, similar instruments have been issued. For example, there have been Equity-Linked Securities (ELS) tied to KOSPI 200 or baskets, offering around 5-15% p.a. coupons depending on conditions. In 2017-2018, a typical autocallable on a basket of Eurostoxx50/S&P/KOSPI might have 6-8% annual coupon with a 50% barrier. More volatile underlyings (like emerging market indices) gave higher coupons ~10% but proved riskier . Our product can be seen as analogous to a “KOSPI 200 step-down autocallable ELS” with a 50% KI barrier, which is a familiar structure. The innovation or tweak here is mainly focusing on a single index and targeting a specific 10% level. We might highlight that in October 2025, autocallables continued to dominate the Korean market issuance, and capital-protected versions (ELB) gained visibility as well . This indicates structured products are alive and well, and our design is timely. Also, in the context of global markets, similar yield notes exist: e.g., in Europe, autocall “Express certificates” on indices are popular  and in the US, structured notes with S&P500 often have comparable payoffs. By providing a comparable analog (say, a note that yielded 5% on HSCEI with 50% barrier , which unfortunately resulted in losses when HSCEI halved), we learned to pick a better underlying (KOSPI) for our version. So there is precedent and learning we build upon.

• Issuer Hedging and Feasibility: From the issuer’s perspective, structuring this product is feasible with current market instruments. The issuer will dynamically hedge by selling the put options corresponding to the barrier and buying call options to pay coupons, etc. Given KOSPI 200 options are traded and there’s a developed derivatives market in Korea, hedging is possible. The 10% coupon implies a certain implied volatility and forward level used – likely the issuer sells a put with strike ~50% (the investor is effectively short that put) and sells some upside (autocall effectively capping at certain points). The cost of these options minus the interest yield on principal should equal the coupon. With interest rates ~3% and KOSPI vol around maybe 18-20%, a 50% deep put over 3 years might fetch a decent premium to support ~10% coupons. This is just to ensure the design is not only appealing to investors but also profitable/manageable for the issuer. Typically, issuers earn a margin in these notes and manage risk via delta-hedging and options. The huge volume of ELS issuance by Korean securities firms indicates they are equipped to hedge such exposures (though one must be cautious of concentration risk – the 2020 turmoil showed that when many ELS are linked to the same indices and those crash, issuers scrambling to hedge can cause systemic issues like FX demand spikes . Our product on KOSPI 200 might be one of many, but KOSPI is a domestically hedgeable index, so it should be fine).

In conclusion, this structured KRW certificate is realistically tailored for South Korea: it uses a trusted underlying (KOSPI 200), fits the common autocallable format (3-year, high coupon, barrier) that Korean investors are accustomed to  , and addresses both the investor demand for yield and the regulatory emphasis on risk transparency. Properly marketed and distributed to suitable investors, it can be a win-win: investors achieve their 10% yield goal in likely scenarios, and issuers meet market demand while managing their risks. However, it must be sold with careful explanation – as we’ve provided – to ensure investors go in with eyes open about the potential outcomes. With appropriate risk controls, the product can be a valuable addition to the South Korean structured products landscape, providing enhanced returns in a locally relevant, well-structured manner.

Sources:

• Structured products market data and trends in Korea   

• Regulatory and risk management commentary   

• Common payoff structures and protection mechanisms  

• Mis-selling case studies and investor profile considerations  

• Historical performance of index-linked ELS  and market shifts to principal protection