You are working for a large US investment bank and are asked to provide a report for the Head

of the Structured Products team. Attached to this exam paper, you will find a description of two

HSBC products that were offered to clients a few years ago $($BufferedStrategies$.$pdf$).$ The first

product is called HSBC Buffered Index Note and the second is called HSBC Buffered Accelerated

Market Participation Security. The head of the team asked you to provide an analysis of these

products, with the aim to understand whether similar products could be offered to your own

clients. The products described in the attached brochure are relatively long term, the head of

your team would like you to consider a maturity of at most one year for these products.

a$)$Analyse both structured products for the S&P $500$ index. For both, the analysis should contain

at least two ways of replicating the payoff with options or other financial instruments

traded in the market. Using the Black$-$Scholes model, your report should contain an analysis

of the price and the risks of the two structured products. What are the main risk sources of

this product and, if this product was sold to investors, how could your bank manage these

risks?

b$)$The Head of the Structured Products team is particularly concerned about the risks of these$$products in the future, i$.$e$.$ after you have sold the products to clients and the maturity of$$the products gets shorter. Provide analysis based on the Black$-$Scholes model to show how$$the risks may change over time.