Volatility-Linked Structured Note — Capital at Risk

Volatility-Linked Structured Note: Expressing a View on Equity Market Fear

Equity market volatility — commonly measured by the VIX index, which prices the 30-day implied volatility of S&P 500 options — tends to mean revert over time. After periods of elevated market stress, when the VIX spikes to 30, 40, or above, it has historically — though not inevitably — returned towards its long-run average of approximately 18–20 over subsequent months and years. This predictable tendency towards mean reversion creates a specific investment opportunity: structured exposure that profits when volatility subsides from elevated levels.

This note is designed for investors with a specific view that current or elevated global equity volatility levels will decline towards or below long-run average levels over a three-year horizon. It is not a defensive or capital-preserving instrument — it is an explicit expression of a volatility view, with leveraged upside in the anticipated scenario and material capital risk if volatility remains elevated or spikes further.

This note involves the risk of total loss of invested capital. It is suitable only for sophisticated investors who understand volatility derivatives and are comfortable with the full-risk nature of this instrument.

The Volatility Mean Reversion Thesis

The VIX index measures the market's expected volatility for the S&P 500 over the next 30 days, derived from the prices of S&P 500 options. When investors are fearful — during geopolitical crises, financial market stress, or sharp equity market sell-offs — they purchase options for portfolio protection, driving up implied volatility and pushing the VIX to elevated levels. When markets stabilise, the demand for protective options decreases, implied volatility falls, and the VIX returns towards its equilibrium level.

The long-run average of the VIX from 1990 to the present is approximately 19–20. Historically, the VIX has spent the majority of its time between 12 and 25, with occasional spikes to 40–80 during extreme events (2008 financial crisis: 80+; March 2020 pandemic: ~82; 2022 Ukraine invasion/rate shock: 35+).

The note is intended to be entered when the VIX or its European equivalent (VSTOXX) is above its long-run average — providing the statistical setup for mean reversion to generate positive returns. Note performance is path-dependent; the timing of entry relative to current volatility levels is material to expected outcomes.

Payoff Structure

The note has a three-year term and pays at maturity based on the performance of a volatility reference index relative to its level at issuance:

Scenario 1 — Volatility declines materially: If the reference volatility index falls 30% or more from its issuance level by maturity, the note returns 100% of capital plus 150% participation in the volatility decline — a potential total return of 145% (100% capital + up to 45% gain) in a strong mean-reversion scenario.

Scenario 2 — Volatility declines moderately: If reference volatility falls between 0% and 30% from issuance by maturity, the note returns 100% of capital plus 150% participation in the actual decline — a positive but more modest return.

Scenario 3 — Volatility flat to modestly elevated: If volatility is within a 0–15% corridor above its issuance level at maturity, the note returns approximately 85–100% of capital — a modest negative return reflecting the corridor protection built into the structure.

Scenario 4 — Volatility significantly elevated: If volatility is 15–40% above its issuance level at maturity, the note's return declines proportionally — investors may lose 15–50% of capital.

Scenario 5 — Extreme volatility spike: If volatility is more than 40% above its issuance level at maturity, or in the event of an extreme market dislocation, investors may lose the majority or all of their invested capital.

The specific payoff thresholds and leverage factors are established at issuance and documented in the note's final term sheet — the above illustrates the structural logic but the actual terms depend on market conditions at subscription.

Counterparty and Structural Considerations

The note is issued by an investment-grade-rated European or US bank acting as structured note issuer and derivative counterparty. Investor credit exposure is therefore to this bank — in the event of the issuing bank's insolvency, investors rank as unsecured creditors and may receive less than face value regardless of how the volatility reference index has performed. Counterparty credit risk is a material risk in all structured notes.

The volatility reference index underlying the note is a rules-based index with transparent methodology, calculated by the issuing bank's structured products division and verified against exchange-traded volatility derivatives prices.

The note is issued in registered form with ISIN and is eligible for custody in standard securities accounts. It is not exchange-listed — investors wishing to exit before maturity must request a secondary market quote from the issuing bank, which may be at a significant discount to intrinsic value.

When This Note Makes Sense

This note is appropriate in specific market environments where:

• The VIX (or relevant volatility measure) is meaningfully above its long-run average at the time of subscription
• The investor has an independent, considered view that volatility is elevated due to transient factors likely to resolve within the three-year term
• The investor can absorb a total loss of the invested capital — this should represent a satellite, not a core, portfolio allocation
• The investor understands volatility derivatives, path dependency, and structured product mechanics

It is not appropriate as an interest rate substitute, an income-generating investment, or a defensive position. It is a directional view on volatility expressed through a structured product.

Risk Considerations

Total loss risk: The note can lose 100% of invested capital in extreme volatility scenarios. This is not a theoretical risk — it is a realistic outcome if a severe and sustained market dislocation occurs during the three-year term.

Path dependency: The note's return depends on the volatility reference level at maturity, not the path taken during the three-year term. Even if volatility is low during most of the term, a spike in the final months before maturity can dramatically reduce or eliminate returns.

Counterparty credit risk: The investor is an unsecured creditor of the issuing bank. Bank insolvency — even if unlikely — would impair the note regardless of volatility performance.

Liquidity risk: The note is not exchange-listed. Secondary market exits require a bank quote which may be at a significant discount, particularly in stressed volatility conditions precisely when investors are most likely to want to exit.

Model and reference risk: The payoff depends on a calculated reference index — the investor relies on the issuer's methodology and calculation accuracy. Index calculation errors or methodology changes could affect the payoff.

Suitability

This note suits only sophisticated investors who specifically want directional exposure to a volatility decline, have fully understood the total-loss risk, and are investing a small allocation of capital that can be entirely forfeited without material impact on their financial position. This is a specialist instrument — not a portfolio building block. Minimum investment $200,000.

How to Invest

Contact our investment team to discuss current VIX/VSTOXX levels, receive the note's indicative term sheet, and review the issuer's structured note programme documentation. Extensive suitability assessment and professional investor categorisation required before subscription. Minimum investment $200,000.

Important: Capital is fully at risk. This note can lose 100% of invested capital. It is an explicit volatility-linked derivative instrument, not a capital-protected product. Past performance and historical VIX mean reversion are not guarantees of future outcomes. This is for information purposes only and does not constitute a personal recommendation. Seek independent financial and derivatives advice before investing. This note illustrates the type of volatility-linked structured product Global Investments advises on — it is not a live investment offer.