The tracker simply replicates the performance of an index as described
above, with no leverage, and will simply expire at the value of the index or underlying it is tracking.

This is akin to covered call writing where the options writing income
translates to a discount on the underlying asset. Selling the Call option
means that the investor benefits from the premium, hence the discount.
Upside is capped however, as any rise in value of the underlying asset
above the strike price is cancelled out by the liability created in selling the
Call option (Call option strike price = cap level).

Example

Discount tracker

Issuer:

ABC Bank

Issue date:

February 2005

Expiry date:

February 2006

Cap:

430p

Underlying asset:

Marks & Spenser (M&S)

Conversion ratio:

1

Underlying price:

400p

Product price:

360p (10% discount)

In the example above, the two dotted lines represent the profit and loss
expiry profiles of the tracker and the short Call option. The solid line
represents the profit and loss profile of the discount tracker.

At maturity

Should the value of M&S increase by 25% to 500p, the discount tracker
would reach the cap limit of 430p (a 19.4% rise in value).

Should the value of M&S increase by 7% to 428p, the value of the discount tracker will be 428p (an 18.9% rise in value).

Should the value of M&S fall by 20% to 320p, the value of the discount
tracker would also fall to 320p (but because of the discount purchase price, this would represent only an 11.1% fall in value).

It can be seen from the above that additional downside protection is
purchased at the expense of limiting upside exposure above a certain level. As with all trackers, no income is paid out but, according to the terms of each product, is built into the capital value.

Discount trackers also have the unusual characteristic of appreciating in
value as time passes, all other factors remaining constant. Should the
underlying asset remain static over the lifetime of the discount tracker (ie
a 0% return), the discount tracker will expire, in the example above, with a 10% gain for the investor.