[Derivative ABC] Puzzling ELS Terms... What Are Nak-in and Dummy?

[Asia Economy Reporter Park Jihwan] Recently, Equity-Linked Securities (ELS) have become quite popular among derivative financial products. Although many investors seek them out, the terms that come up when explaining the structure of ELS products are often unfamiliar just by name. We have summarized ELS-related terms that investors tend to overlook because they find them difficult.

Underlying Asset. The asset that determines the investment returns of an ELS product. It is classified into index-linked, where returns are determined based on an index, and stock-linked, where returns are determined based on individual stocks.

Knock-in. Refers to the principal loss threshold. If the underlying asset reaches the knock-in price even once, losses may occur if the index does not meet the maturity conditions.

Barrier (strike price). Refers to the profit repayment condition. When set, the reference price is set at 100%, and maturity and early redemption conditions are established.

Dummy. Refers to the bonus return paid if the repayment conditions are not met but the knock-in, which is the principal loss zone, has not been touched.

Auto Call. Refers to automatic redemption when the price of the underlying asset satisfies the barrier price.