Spot, Forward, Best Timing, Asian strike... Which one should you use depending on your needs? The jargon and anglicisms can often make these mechanisms difficult to understand. Let's try to explain them!
The strike price represents the level of the underlying asset at the product’s initial observation date. It is crucial because it determines the future performance of the structured product. This chosen level becomes the reference for all the options composing the product, including the capital protection barrier, the coupon barrier, and the early redemption barrier.
There are several types of strikes, each varying in cost depending on the advantage it provides to the investor.
The spot strike is the most commonly used type for products subscribed in securities accounts. The initial level is determined on the day of the launch, most often at the market close. This is the cheapest strike because it provides no optimization. It allows for the best visibility. It can also be ‘live’ and determined at the exact moment of confirming the trade with the issuer.
Contrary to the spot strike, the forward strike is commonly used for products subscribed in life insurance policies. It sets a future date on which the initial level will be determined. This gives insurers time to reference the product and distributors time to market the product to investors. It limits the risks for investors in case of significant market movements during the marketing period. Typically, it slightly impacts the product’s return compared to the spot strike.
As the name suggests, the average strike is an average of several closing levels of the underlying asset. It could be an average between two days or all the days of a month. It impacts the product's return more than the previous strikes, especially if the dates are spread out.
The Best Timing strike allows you to benefit from the most advantageous strike level — the lowest observation level — between two or more dates. It is more expensive than the previous strike types because it optimizes the product's entry point and therefore reduces risk.
As its name implies, it is fixed at a specific level, regardless of the current price of the underlying asset. The more advantageous the chosen level — i.e., below the current price of the underlying asset — the more this mechanism impacts the product’s return.
The strike price represents the level of the underlying asset at the product's initial observation date. There are several types, from the cheapest to the most expensive: spot strike, forward strike, average strike, best timing, or fixed strike. The impact of these different types of strikes on returns depends on their level of risk.
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