Structured Products

Research Report
Report Prepared On: 01/10/13

Structured Product Details Phoenix Autocallable Optimization

Securities with Contingent Protection
Name Phoenix Autocallable
Optimization Securities with
Contingent Protection linked to
linked to Amazon.com, Inc.
Issue Size
Amazon.com, Inc.
$2.45 million Description
Issue Price $10 UBS issued $2.45 million of Phoenix Autocallable Optimization Securities with Contin-
Term 12 Months gent Protection linked to Amazon.com, Inc. on December 9, 2010 at $10 per note.
Annualized Coupon 15.40%
These 12-month notes are UBS-branded reverse convertible notes. On the quarterly cou-
Pricing Date December 6, 2010 pon observation date, if the notes are not called back, they pay either quarterly coupon at
Issue Date December 9, 2010 an annualized rate of 15.40% if Amazon.com, Inc.’s stock price closes above the coupon
Valuation Date December 7, 2011 barrier $133.54, or no coupon if the stock price closes below the barrier. The first cou-
Maturity Date December 13, 2011 pon observation date is March 7, 2011. This autocallable notes will be called back if the
Issuer UBS
reference stock price on any quarterly call observation date after March 7, 2011 exceeds
CDS Rate 45.77 bps the initial stock price $178.05. In this case, investors receive the principal plus any unpaid
Swap Rate 0.78% coupons. At maturity, the notes convert into shares of the reference security—0.06 share
of Amazon.com, Inc.’s stock in this case—if the market value of the reference stock at
Reference Asset Amazon.com, Inc.’s stock the note’s maturity is below the trigger price $133.54 (75% of the reference asset on De-
cember 6, 2010). Otherwise, investors will receive the $10 face value.
Initial Level $178.05
Dividend Rate
Implied Volatility
0.00%
37.49%
Valuation
This note can be viewed as a combination of a zero-coupon note from UBS, a series of
contingent coupon payments, and a short put option on the reference asset. For reason-
able valuation inputs this note was worth $9.76 per $10 face value when it was issued on
December 9, 2010, including $9.93 for the present value of the zero-coupon note, ($0.82)
Fair Price at Issue $9.76 for the short put options, and $0.65 for the present value of all future contingent coupon
payments.
CUSIP 90267F287
SEC Link www.sec.gov/Archives/edgar/
There is no active secondary market for most structured products. Structured products,
data/1114446/000139340110000628/
c204821_690567-424b2.htm including this note, therefore are much less liquid than simple stocks, bonds, notes and
mutual funds. Investors are likely to receive less than the structured product’s estimated
market value if they try to sell the structured product prior to maturity. Our valuations do
not incorporate this relative lack of liquidity and therefore should be considered an upper
bound on the value of the structured product.
Payoff Curve at Maturity

$25
Related Research
Trigger Phoenix Notes: Not Called Reference Asset
Total Payout per $10 Invested

$20
Research Papers:
www.slcg.com/research.php $15
• “Are Structured Products Suitable for Retail Inves- Trigger
tors?” December 2006. $10
• “Structured Products in the Aftermath of Lehman
Brothers,” November 2009.
• “What TiVo and JP Morgan Teach Us about Re- $5 Initial Value
verse Convertibles,” June 2010.
$0
0 50 100 150 200 250 300 350 400
Ending Value of Reference Asset

Mike Yan, Ph.D., The payoff diagram shows the final payoff of this note given Amazon.com, Inc.’s stock price (horizontal
axis). For comparison, the dashed line shows the payoff if you invested in Amazon.com, Inc.’s stock directly.
Senior Financial Economist, SLCG
(+1) 703.539.6780
[email protected]

FIND SLCG STRUCTURED © 2012 SECURITIES LITIGATION & CONSULTING GROUP. ALL RIGHTS RESERVED.
PRODUCTS RESEARCH AT 3998 FAIR RIDGE DRIVE, SUITE 250, FAIRFAX, VA 22033 | MAIN (703) 246-9380 | [email protected]
www.SLCG.com 100 WILSHIRE BLVD, SUITE 950, SANTA MONICA, CA 90401 | MAIN (310) 917-1075
 Phoenix Autocallable Optimization Securities with Contingent Protection linked to Amazon.com, Inc.
Page 2

Principal Payback Table Maturity Payoff Diagram

Amazon.com, Inc.’s Note Payoff Did Amazon.com, Inc.’s

stock price close below
Stock the initial level $178.05 on
YES NO
any call observation date?
$0.00 $0.00
$17.81 $1.00
$35.61 $2.00
Did Amazon.com, Inc.’s The notes will be called
$53.42 $3.00 stock price on December on any call observation
7, 2011 close below date that Amazon.com,
YES NO Inc.’s stock price closed
$71.22 $4.00 $133.54?
above $178.05.
$89.03 $5.00
$106.83 $6.00
$124.64 $7.00 You will receive the
market value of 0.06 You will receive $10 at
share of Amazon.com, maturity.
$142.44 $10.00 Inc.’s stock at maturity.
$160.25 $10.00
$178.05 $10.00
The contingent payoffs of this Phoenix Autocallable Optimization Security with Contingent Protection.
$195.86 $10.00
$213.66 $10.00
$231.47 $10.00
Analysis
The 15.40% coupon rate on this Phoenix Autocallable Optimization Security with Contin-
$249.27 $10.00 gent Protection is higher than those paid by UBS on its straight debts but, in addition to
UBS’s credit risk, investors bear the risk that, 1) the note may be called; 2) the note may pay
$267.08 $10.00 zero coupon because of the coupon contingency; 3) and the note will be converted into
shares of Amazon.com, Inc.’s stock when Amazon.com, Inc.’s stock is worth substantially
less than the face value of the note.
Investors purchasing these autocallable phoenix notes effectively sell contingent put op-
tions to UBS and post the note’s issue price as collateral to secure satisfaction of the
investors’ obligations under the option contracts. UBS pays investors a contingent cou-
pon that is part payment for the put options and part interest on the investors’ posted
collateral. This Phoenix Autocallable Optimization Security with Contingent Protection
is fairly priced if and only if the difference between the contingent coupon and interest
paid on UBS’s straight debt equals the value of the contingent put options investors are
giving to UBS. Whether this Phoenix Autocallable Optimization Security with Contingent
Protection is suitable or not is identically equivalent to whether selling put options on the
reference stock at the option premium being paid by UBS was suitable for the investor.
UBS’s Stock Price

$61

$51

$41

$31

$21

$11

$1

The graph above shows the adjusted closing price of the issuer UBS for the past several years. The stock price
of the issuer is an indication of the financial strength of UBS. The adjusted price shown above incorporates
any stock split, reverse stock split, etc.
 Phoenix Autocallable Optimization Securities with Contingent Protection linked to Amazon.com, Inc.
Page 3

UBS’s CDS Rate

500
450
400
350
300
250
200
150
100
50
0

Credit default swap (CDS) rates are the market price that investors require to bear credit risk of an issuer such as UBS. CDS rates are usually given in basis points (bps). One basis point
equals 0.01%. Higher CDS rates reflect higher perceived credit risk, higher required yields, and therefore lower market value of UBS’s debt, including outstanding Phoenix Autocallable
Optimization Security with Contingent Protection. Fluctuations in UBS’s CDS rate impact the market value of the notes in the secondary market.

Amazon.com, Inc.’s Stock Price

$250

$200

$150

$100

$50

$0

The graph above shows the historical levels of Amazon.com, Inc.’s stock for the past several years. The final payoff of this note is determined by Amazon.com, Inc.’s stock price at ma-
turity. Higher fluctuations in Amazon.com, Inc.’s stock price correspond to a greater uncertainty in the final payout of this Phoenix Autocallable Optimization Security with Contingent
Protection.

Realized Payoff

This note was early terminated on June 7, 2011 due to its automatic call feature. The Amazon.com, Inc.’s stock price on June 7, 2011 was
$187.55, higher than the initial level $178.05. Investors received $10 per note plus any unpaid coupons.
 Phoenix Autocallable Optimization Securities with Contingent Protection linked to Amazon.com, Inc.
Page 4

Reference Asset Amazon.com, Inc.’s Stock’s Implied Volatility

120%

100%

80%

60%

40%

20%

0%

The annualized implied volatility of Amazon.com, Inc.’s stock on December 6, 2010 was 37.49%, meaning that options contracts on Amazon.com, Inc.’s stock were trading at prices
that reflect an expected annual volatility of 37.49%. The higher the implied volatility, the larger the expected fluctuations of Amazon.com, Inc.’s stock price and of the Note’s market
value during the life of the Notes.

Decomposition of this Phoenix Autocallable Optimization Security with Contingent Protection

A zero-coupon note from UBS $9.93

Phoenix Autocallable Optimiza-

tion Securities with Contingent
Protection linked to Amazon. Present value of the put options ($0.82)
com, Inc.

Present value of all contingent $0.65

coupons

$9.76

This note can be decomposed into different components, and each component can be valued separately. The chart above shows the value of each component of this Phoenix Autocallable
Optimization Security with Contingent Protection.

1. Delta measures the sensitivity of the price of the note to the Amazon.com, Inc.’s stock price on December 6, 2010.
2. CDS rates can be considered a measure of the probability that an issuer will default over a certain period of time and the likely loss given a default. The lower the CDS
rate, the lower the default probability. CDS rate is given in basis points (1 basis point equals 0.01%), and is considered as a market premium, on top of the risk-free rate,
that investors require to insure against a potential default.
3. Fair price evaluation is based on the Black-Scholes model of the Amazon.com, Inc.’s stock on December 6, 2010.
4. Calculated payout at maturity is only an approximation, and may differ from actual payouts at maturity.
5. Our evaluation does not include any transaction fees, broker commissions, or liquidity discounts on the notes.

©2012 Securities Litigation and Consulting Group. All Rights Reserved. This research report and its contents are for informational and educational purposes
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