CMFAS RES6A Quiz 87

Extended Settlement (ES) Contracts are single stock futures listed on SGX-ST that provide investors with the ability to take short positions. A significant advantage of ES contracts is that they allow investors to profit from anticipated price declines without incurring the immediate borrowing costs typically associated with short selling in the ready market. Additionally, the risk of a compulsory buying-in is greatly reduced, as it generally only arises if the position is held until settlement and the investor fails to deliver the underlying shares. Contra trading accounts facilitate short-term, often intra-day, positions but do not offer the same extended tenure or avoidance of borrowing costs for a longer bearish view. Margin trading accounts are primarily used for leveraged long positions and generally do not permit short selling. Standard ready market transactions involve immediate settlement and traditional short selling mechanisms, which typically entail borrowing costs and a more immediate risk of buying-in.

The Auto-Redeemable Structured Fund XYZ’s product description explicitly states that it becomes auto-redeemable from one year after the inception date and every six months thereafter until maturity. The specific condition for this auto-redemption to occur is when the performance of the Nikkei 225 index, at the valuation time on the relevant early redemption observation date, is greater than or equal to the performance of the S&P 500 index. This means the relative performance of the two underlying indices is the key trigger. The other options describe conditions that are either the inverse of the trigger, a potential outcome at maturity if auto-redemption does not occur, or an action initiated by the investor rather than an automatic product feature.

Rho is one of the ‘Greeks’ that measures the sensitivity of an option’s price to a change in the risk-free interest rate. For call options, an increase in interest rates generally makes the option more valuable because the present value of the strike price (which the holder pays upon exercise) decreases, and the opportunity cost of holding the underlying asset (instead of the option) increases. Conversely, for put options, an increase in interest rates typically makes the option less valuable because the present value of the strike price (which the holder receives upon exercise) decreases, reducing the potential profit. Therefore, with an increase in interest rates, call option premiums tend to rise, and put option premiums tend to fall, assuming all other factors remain constant.

The accumulator agreement described is a ‘1X2 gear’ scheme. According to the product mechanism, if the share price is below the strike price, the investor must buy 2X the predefined quantities of the reference stock. In this scenario, the strike price is SGD 5.00, and the closing price is SGD 4.80, which is below the strike price. The predefined daily quantity is 100 shares, so 2X would be 200 shares. The purchase price is fixed at the strike price, regardless of the market price dropping below it. Therefore, the investor is obligated to purchase 200 shares at SGD 5.00 per share. The agreement would only terminate if the closing price was at or above the knock-out barrier (SGD 5.50). The 1X accumulation would occur if the share price was above the strike price but below the knock-out barrier.

The question tests the understanding of how to calculate the coupon payment for an Inverse Floater Note, a concept covered in CMFAS Module 6A. The coupon for an Inverse Floater Note is determined by the formula: Coupon = Max [X% ― Leverage x Floating Rate Index, Min Coupon]. In this scenario, the initial fixed rate (X%) is 6.0%, the leverage factor is 1.5, the current floating interest rate index is 3.0%, and the minimum coupon floor is 1.0%. First, calculate the leveraged reduction: 1.5 (Leverage) 3.0% (Floating Rate Index) = 4.5%. Next, subtract this from the initial fixed rate: 6.0% (X%) – 4.5% = 1.5%. Finally, compare this calculated coupon with the minimum coupon floor: Max [1.5%, 1.0%]. Since 1.5% is greater than 1.0%, the coupon payment for this period is 1.5%. Other options represent common miscalculations, such as only considering the floor, using the floating rate index directly, or incorrectly applying the leverage factor.

A ‘Worst of’ Equity Linked Note (ELN) is a structured product where the return is linked to the performance of a basket of multiple underlying assets (e.g., stocks or indices), but the payout is determined by the performance of the single worst-performing asset in that basket. This means that even if most of the underlying assets perform well, a significant drop in just one of them can lead to a substantial loss for the investor. In contrast, a standard ELN linked to a single underlying asset exposes the investor only to the risk of that specific asset. The ‘Worst of’ feature introduces a higher level of risk because the investor is vulnerable to the downside of any of the underlying assets, making it a more complex and generally riskier investment compared to an ELN linked to a single stock. This increased risk is typically compensated by a higher potential yield. The other options are incorrect because the ‘Worst of’ ELN does not inherently offer stronger principal preservation (it often carries higher risk), it does not necessarily reduce liquidity risk (ELNs generally have limited liquidity), and the issuer’s credit risk is a separate factor that applies to both types of ELNs and is not reduced by the ‘Worst of’ structure.

Structured funds offering capital preservation come with specific conditions that investors must understand. The capital preservation feature is typically contingent on the investor holding the fund until its full maturity date. Furthermore, the preservation usually applies to the initial capital invested after deducting any upfront sales charges, meaning these charges are not covered by the preservation. It is also crucial to note that this guarantee is not absolute; it does not apply if the guarantor of the capital preservation becomes insolvent and cannot fulfill its obligations. Therefore, understanding these limitations, particularly the requirement to hold to maturity and the deduction of sales charges, is essential for a complete comprehension of the product.

A knock-out event, also known as a Mandatory Call Event (MCE), is triggered if the observed level of any underlying index falls below a specified percentage of its initial level. In this scenario, the threshold is 75% of the initial level for each index. Let’s calculate the 75% threshold for each index: – Index P: 75% of 2000 = 0.75 2000 = 1500 – Index Q: 75% of 150 = 0.75 150 = 112.5 – Index R: 75% of 500 = 0.75 500 = 375 – Index S: 75% of 1200 = 0.75 1200 = 900 Now, compare the observed levels with their respective 75% thresholds: – Index P: Observed 1550 is NOT less than 1500. – Index Q: Observed 110 IS less than 112.5. This triggers the knock-out event. – Index R: Observed 400 is NOT less than 375. – Index S: Observed 950 is NOT less than 900. Since Index Q’s observed level (110) fell below its 75% initial level threshold (112.5), a knock-out event has indeed occurred. The condition ‘any index’ means that only one index needs to breach the threshold for the event to be triggered.

The scenario describes a fund manager needing to swiftly rebalance a portfolio from illiquid equities to bonds. The provided text highlights that futures are highly effective and less costly for asset allocation adjustments. Specifically, the example ‘Asset Allocation of Bonds & Stocks’ illustrates how a fund manager can buy bond futures to immediately establish the desired bond exposure, even while waiting to dispose of illiquid stocks. This strategy leverages the benefits of futures, such as lower brokerage costs, smaller cash outlay due to margining, shorter transaction time, less market impact, and being less disruptive to the portfolio management process. Once the illiquid equities are sold, the futures positions can be unwound, and physical bonds can be purchased. Option 2 is incorrect because selling illiquid equities immediately, especially at a discount, might not be feasible or optimal, and it bypasses the efficiency benefits of using futures to bridge the transition. Option 3, while involving derivatives, focuses on options for hedging and gaining exposure, but the provided text specifically details the use of futures for direct asset allocation shifts in such scenarios, making it a less direct or optimal solution for this particular rebalancing need. Option 4 is incorrect as it contradicts the requirement for a swift reduction in equity exposure and delays the rebalancing, which is contrary to the manager’s identified need.

Auto-callable structured products are characterized by the issuer’s discretion to redeem the product early under predefined conditions. This mechanism means the investor does not control the duration of their investment, leading to ‘call risk’. If the product is called early, especially in a market environment where comparable new investments offer lower yields, the investor faces ‘reinvestment risk’ – the challenge of finding a new investment with similar returns. While these products can offer attractive yields, these specific risks are inherent to the auto-callable structure. The redemption amount upon a call event is not always guaranteed to be the initial capital plus a positive return; it can be higher, lower, or even zero depending on the product’s terms and underlying asset performance. Furthermore, the holding period is not fixed and can be shorter than the stated maturity. While short option positions within these products carry risks, the question specifically targets the distinct risk associated with the auto-callable feature itself.

A Bull Equity-Linked Note (ELN) is a structured product that combines a fixed-income instrument with an embedded short put option. When an investor purchases an ELN with an embedded short put, they are effectively taking on the role of the put writer. As the put writer, the investor receives a premium, which contributes to an enhanced yield compared to a plain vanilla note. At the note’s maturity, there are two primary outcomes based on the underlying share price (ST) relative to the put option’s strike price (X). If the underlying share price (ST) is at or above the strike price (X), the embedded put option expires worthless. In this scenario, the investor receives the full face value of the note in cash. However, if the underlying share price (ST) falls below the strike price (X), the put option is in-the-money. The counterparty (the put buyer) will exercise the option, obligating the investor (as the put writer) to purchase the underlying shares at the strike price. Consequently, the investor receives a predetermined number of shares instead of cash. This number is typically calculated by dividing the note’s face value by the strike price. This outcome can lead to a loss for the investor if the market value of the shares received is less than the effective price at which they are acquired. In the given scenario, the underlying share price of XYZ Corp ($40.00) is below the put strike price ($45.00). Therefore, the embedded put option will be exercised, and the noteholder will receive XYZ Corp shares, calculated as the face value divided by the strike price, potentially incurring a loss.

The investor’s desire for ‘consistent distributions at regular intervals’ refers to fixed or variable coupons, and ‘potential capital appreciation linked to the performance of its core holdings’ refers to participative returns based on the outcome of the underlying asset(s). Both of these aspects fall under the ‘Degree of Payout Schedule’ component of a structured fund. This component specifically defines whether the fund provides fixed/variable income, participative returns, or a combination of both. While the underlying asset’s performance contributes to capital appreciation, and the market view influences the strategy, the direct mechanism for how these returns are distributed to the investor (as income or growth) is determined by the payout schedule. The fund’s tenor or maturity period relates to the investment horizon, not the type of returns generated.

The question describes a scenario where an Exchange Traded Fund (ETF) aims to track an index’s performance by using derivative or over-the-counter (OTC) transactions, rather than directly purchasing the underlying securities that make up the index. This method is known as synthetic replication. Synthetic replication ETFs achieve their objective by entering into agreements, typically with a counterparty, to receive the return of the index in exchange for a fee. This contrasts with direct replication (also known as physical replication or cash-based replication), where the ETF directly invests in the actual constituent securities of the underlying index. Full replication and representative sampling are both sub-methods of direct replication. Full replication involves purchasing all the securities in the index in the same proportions, while representative sampling involves purchasing a subset of the index’s securities to closely match its performance.

To determine if a knock-out event has occurred, we must calculate 75% of each index’s initial level and compare it to its observed level. A knock-out event is triggered if any index’s observed level falls below this 75% threshold. 1. Index P: Initial Level = 1200. 75% of Initial Level = 1200 0.75 = 900. Observed Level = 910. Since 910 is greater than 900, Index P has not triggered a knock-out. 2. Index Q: Initial Level = 800. 75% of Initial Level = 800 0.75 = 600. Observed Level = 590. Since 590 is less than 600, Index Q has triggered a knock-out event. 3. Index R: Initial Level = 250. 75% of Initial Level = 250 0.75 = 187.5. Observed Level = 195. Since 195 is greater than 187.5, Index R has not triggered a knock-out. 4. Index S: Initial Level = 1500. 75% of Initial Level = 1500 0.75 = 1125. Observed Level = 1150. Since 1150 is greater than 1125, Index S has not triggered a knock-out. Because Index Q’s observed level (590) is below its 75% initial level threshold (600), a knock-out event has indeed occurred. Therefore, the statement indicating a knock-out due to Index Q is correct. The other options are incorrect because they either state no knock-out occurred or attribute the knock-out to an incorrect index.

The question differentiates between ‘principal preservation’ and ‘principal guarantee’ features in structured products, a key concept in understanding their risk profiles. A principal preservation feature is structured by investing the principal component in fixed income securities, such as zero-coupon bonds, which are expected to mature at par concurrently with the structured product. While this aims to return the initial capital, it is not an absolute guarantee, as the underlying fixed income securities carry credit risk and may default, potentially affecting the principal. Furthermore, early termination of such products can lead to losses. In contrast, a principal guarantee feature involves the investor’s initial investment being explicitly secured by certain collateral, essentially acting as a form of investment insurance. This added layer of security means that products with a principal guarantee typically incur a higher cost, which is factored into the product’s pricing, making them generally more expensive than those offering only principal preservation. The other options contain inaccuracies: early withdrawal from a principal preservation product can indeed result in losses; neither feature is a mandatory regulatory requirement for all structured products; and the risk allocation described in the fourth option misrepresents the nature of issuer and credit risks associated with these features.

To determine the required allocation to the risky asset in a Capital Protection Portfolio Insurance (CPPI) strategy, we first need to identify the key parameters: the initial portfolio value (IPV), the current portfolio value (CPV), the multiplier (M), and the floor percentage (F%). 1. Initial Portfolio Value (IPV): $100 2. Current Portfolio Value (CPV): $105 3. Multiplier (M): 5 4. Floor Percentage (F%): 86% of the initial portfolio value. Next, we calculate the current portfolio value as a percentage of the initial portfolio value: CPV as % of IPV = (Current Portfolio Value / Initial Portfolio Value) 100% = ($105 / $100) 100% = 105%. Now, we apply the CPPI formula to find the target allocation percentage for the risky asset. The formula is: Multiplier × (Current Portfolio Value as % of IPV – Floor Percentage). Target Allocation % = M × (CPV as % of IPV – F%) Target Allocation % = 5 × (105% – 86%) Target Allocation % = 5 × 19% Target Allocation % = 95% Finally, to find the dollar amount that should be allocated to the risky asset, we apply this target percentage to the current portfolio value: Required Allocation to Risky Asset = Target Allocation % × Current Portfolio Value Required Allocation to Risky Asset = 95% × $105 Required Allocation to Risky Asset = 0.95 × $105 = $99.75. Therefore, the portfolio manager should allocate $99.75 to the risky asset.

The Credit Support Annex (CSA) is a critical legal document used in over-the-counter (OTC) derivative transactions, including options. It serves as an annex to the International Swaps and Derivatives Association (ISDA) Master Agreement. Its primary purpose is to define the specific terms and conditions for the posting and transfer of collateral between counterparties. This mechanism is essential for mitigating counterparty credit risk, as it provides security against potential losses should one party fail to meet its contractual obligations. While the ISDA Master Agreement establishes the overarching contractual framework for OTC derivatives, the CSA specifically addresses the practical aspects of collateral management, such as the types of eligible collateral, valuation procedures, and the frequency of collateral calls. The Futures Commission Merchant (FCM) Agreement is relevant to exchange-traded derivatives and clearing brokers, and a Bilateral Netting Agreement, while important for reducing exposure, does not specifically detail the collateral exchange terms in the same way a CSA does.

The investor’s objective is to generate additional income from their existing stock holdings while partially mitigating potential losses. Selling a covered call option involves owning the underlying stock and simultaneously selling a call option against it. The premium received from selling the call option provides immediate income. If the stock price falls, this premium helps to offset some of the losses on the stock. However, if the stock price rises significantly above the strike price, the investor’s upside profit is capped at the strike price plus the premium received, as they would be obligated to sell the shares at the strike price. This strategy aligns perfectly with the stated goals. Purchasing a put option (protective put) primarily aims to protect against downside risk by paying a premium, not to generate income. Selling a naked (uncovered) call option generates income but exposes the investor to unlimited potential losses if the stock price rises sharply, which contradicts the goal of partially mitigating losses, especially when the investor already holds the stock.

For a net short option position, the investor has negative gamma. Gamma measures the sensitivity of delta to changes in the underlying asset price. When gamma is high, delta changes rapidly. If the underlying asset price moves unfavorably, a negative gamma position means that the delta will move in a way that accelerates losses, making the position significantly riskier. This rapid change in delta makes delta hedging a dynamic and challenging process, as the hedge needs constant rebalancing. The other options describe different option Greeks: the erosion of value over time is related to Theta (time decay), reduced sensitivity to implied volatility is not a direct implication of gamma for a short position (Vega addresses volatility sensitivity), and gamma is highest at-the-money, decreasing as an option goes deeper in or out of the money, meaning delta does not stabilize with high gamma; rather, it changes rapidly.

The product terms clearly state that the fund is ‘call protected for initial 1 ½-year period’ from the Initial Date of 16 December 2014. This protection period concludes around mid-June 2016. The ‘Key Dates’ section explicitly lists ‘First Callable Date = 15 Jun 2016’ and also includes 15 Jun 2016 as the first ‘Early Redemption Observation Date’. Therefore, 15 June 2016 is indeed the earliest date on which a mandatory call event can occur. For the trigger conditions, the ‘Mandatory Call Event’ section specifies that a knock-out event is triggered ‘if the closing index level of ANY 4 of the underlying indices (Index1-4) on the Early Redemption Observation Date is < 75% of initial level'. This means that the performance of four, not all or fewer than four, of the underlying indices must fall below the 75% threshold of their initial level for the event to be activated. Other options contain inaccuracies regarding either the first callable date, the number of indices required to trigger the event, or the specific performance threshold.

The trading name of a structured warrant provides key information about its features. According to the CMFAS Module 6A syllabus, an ‘e’ prefix before the type of warrant (e.g., ‘eCW’ or ‘ePW’) signifies a European-style warrant. Conversely, if there is no prefix immediately preceding the type of warrant (e.g., ‘CW’ or ‘PW’), it indicates that the warrant is an American-style warrant. American-style warrants allow for exercise at any time up to and including the expiration date, while European-style warrants can only be exercised on the expiration date. Therefore, the absence of a prefix in ‘MNO PQR PW261120’ clearly denotes an American-style warrant.

To calculate the number of futures contracts required for a delta-neutral hedge, we first need to determine the hedge ratio (h). Based on the principles of interest rate futures hedging and the implied methodology from the provided CMFAS Module 6A materials, the hedge ratio can be calculated as: h = – (Loan Tenor / Futures Tenor) (1 / (1 + Current Rate Loan Tenor / 360)) Correlation. Given the following parameters: Loan Value = SGD 75 million Loan Tenor = 9 months = 270 days Current Rate (9-month SGD SIBOR) = 3.10% or 0.0310 Futures Tenor (for a 3-month Eurodollar future) = 90 days Correlation between borrowing rate and futures rate = 0.85 Futures Contract Size = SGD 1 million Step 1: Calculate the hedge ratio (h). h = – (270 days / 90 days) (1 / (1 + 0.0310 270 / 360)) 0.85 h = – 3 (1 / (1 + 0.0310 0.75)) 0.85 h = – 3 (1 / (1 + 0.02325)) 0.85 h = – 3 (1 / 1.02325) 0.85 h = – 3 0.977280488 0.85 h = – 2.931841464 0.85 h = – 2.4920652444 Step 2: Calculate the number of contracts. The number of contracts is given by: Number of contracts = – Hedge ratio x Loan Value / Contract Size Number of contracts = – (-2.4920652444) (SGD 75,000,000 / SGD 1,000,000) Number of contracts = 2.4920652444 75 Number of contracts = 186.90489333 Rounding to the nearest whole number, the treasurer should short 187 futures contracts to achieve a delta-neutral hedge.

A ratio spread involves buying and selling options in a specified ratio, typically with more options sold than bought (e.g., 2:1). While it is often employed as a market-neutral strategy when an investor anticipates little movement in the underlying asset’s price, a critical characteristic of this strategy, especially when there is a net short position, is its risk-return profile. The profit potential is limited, but the strategy carries potentially unlimited risk on the downside if the underlying asset moves significantly against the short options. This unlimited downside risk is a key distinguishing feature and a major concern for investors utilizing this strategy. Other options strategies, such as butterfly spreads, are designed with limited maximum losses. While limited profit potential is true for ratio spreads, it is not the most significant risk when compared to the potential for unlimited losses. The risk of early exercise is a general option risk but not the primary, unique risk highlighted for ratio spreads.

This question assesses the candidate’s understanding of the specific final settlement price determination mechanisms for different futures contracts as outlined in the CMFAS Module 6A syllabus, Appendix C. It requires distinguishing between the settlement basis for Euroyen TIBOR Futures and 3-month Singapore Dollar Interest Rate Futures. For Euroyen TIBOR Futures, the final settlement price is derived from the Tokyo Financial Exchange’s (TFX) own Euroyen TIBOR contract’s final settlement price. In contrast, for 3-month Singapore Dollar Interest Rate Futures, the final settlement price is based on the Association of Banks in Singapore’s USD/SGD Swap Offered Rates, specifically those determined at 11:00 am, Singapore time, on the last trading day. The incorrect options either misattribute the settlement basis of one contract to another, or incorrectly apply the settlement basis of a completely different contract (like the 10-year JGB futures or the Eurodollar futures, which uses British Bankers’ Association rates) to the contracts in question.

To determine the number of futures contracts needed to hedge the equity portfolio, the formula for hedging equity risks provided in the CMFAS Module 6A syllabus is applied: N = VP / F x T x β. Here, VP represents the current value of the portfolio, F is the current futures quote, T is the value per tick (contract multiplier), and β is the beta of the portfolio. Substituting the given values: Portfolio Value (VP) = $15,000,000, Current Futures Quote (F) = 3,000, Value per Tick (T) = $50, and Portfolio Beta (β) = 1.2. The calculation proceeds as follows: N = ($15,000,000 / 3,000) $50 1.2. First, $15,000,000 divided by 3,000 equals 5,000. Then, 5,000 multiplied by $50 equals 250,000. Finally, 250,000 multiplied by 1.2 equals 300,000. Therefore, 300,000 futures contracts should be transacted to achieve the desired hedge.

The fund trustee’s primary role is to act in a fiduciary capacity, looking after the interests of the unit holders and ensuring that the fund manager manages the Collective Investment Scheme (CIS) in accordance with the investment objective and restrictions laid out in the trust deed and prospectus. This includes overseeing how the fund manager addresses potential conflicts of interest. The text explicitly states that the fund manager could address conflicts of interests in various ways, including ensuring affiliated entities undertake to resolve conflicts fairly, and implementing measures such as Chinese walls or different reporting lines to protect investors’ interests. Therefore, the trustee’s responsibility is to ensure the manager takes appropriate action, and the manager’s specific measure would be to implement internal controls like Chinese walls. Other options describe responsibilities that are either incorrect for the trustee in this specific context (e.g., directly replacing service providers, reporting to MAS for initial conflict identification rather than a confirmed breach) or misattribute roles (e.g., manager having sole responsibility without oversight, trustee preparing accounts). Calculating Value-at-Risk (VaR) or frequent reconciliation are risk management techniques for financial and operational risks, respectively, but not the direct measure for mitigating a conflict of interest arising from an affiliated service provider.

For a Bull Knock-Out Contract, when a mandatory call event is triggered, the contract is settled at its residual value. The residual value is calculated using the formula: (Settlement Price – Strike Price) / Conversion Ratio. In this scenario, the settlement price is the underlying share price at which the mandatory call event was triggered, which is $36.50. The Strike Price is $35.00, and the Conversion Ratio is 10:1. Therefore, the residual value is ($36.50 – $35.00) / 10 = $1.50 / 10 = $0.15. The Call Price is the trigger level for the mandatory call event, but the settlement price is the actual underlying price when the event occurs, which is used in the residual value calculation.

The question describes an options strategy involving the same underlying security but with distinct strike prices and varying expiration dates. This combination precisely defines a diagonal spread. A vertical spread involves options with the same expiration month but different strike prices. A horizontal, or calendar, spread uses options with the same strike prices but different expiration dates. A condor spread is a variation typically involving four options with four different strike prices, which can be constructed as a vertical or diagonal spread depending on the expiration dates, but the fundamental characteristic of having both different strikes and different expirations is the hallmark of a diagonal spread.

The adjustment to the exercise price of a structured warrant due to dividends is calculated using a specific adjustment factor. The formula for the new exercise price is: New Exercise Price = Old Exercise Price × Adjustment Factor. The Adjustment Factor is determined by (P – SD – ND) / (P – ND), where P is the last cum-date closing price of the underlying, SD is the special dividend per share, and ND is the normal dividend per share. Given: Old Exercise Price = $10.00 Last cum-date closing price (P) = $10.50 Special dividend per share (SD) = $0.20 Normal dividend per share (ND) = $0.10 First, calculate the Adjustment Factor: Adjustment Factor = (P – SD – ND) / (P – ND) Adjustment Factor = (10.50 – 0.20 – 0.10) / (10.50 – 0.10) Adjustment Factor = (10.20) / (10.40) Adjustment Factor ≈ 0.98076923 Next, calculate the New Exercise Price: New Exercise Price = Old Exercise Price × Adjustment Factor New Exercise Price = $10.00 × 0.98076923 New Exercise Price ≈ $9.8076923 Rounding to two decimal places, the adjusted exercise price is $9.81.

This question assesses the understanding of the early redemption mechanism for a structured investment product. The scenario specifies that the event occurs on the observation date corresponding to 2.0 years from the initial date. According to the ‘Payout Before Maturity’ table provided in the product terms, the payout price for the 2.0-year observation is 117.00%. The condition for early redemption, where the returns performance of Index 1 (Nikkei 225) is greater than or equal to the returns performance of Index 2 (S&P 500), is met. Therefore, an early redemption is triggered, and the investor receives the specified payout of 117.00% of their initial investment. The other options represent different payout scenarios: 100.00% is the redemption value at maturity if Index 1 underperforms Index 2; 125.50% is the payout at maturity if Index 1 performs equal to or better than Index 2; and 112.75% is the payout price for an earlier observation date (1.5 years).