| Equity linked note (ELN) is a derivative whose return is linked to stock price, stock index, or other assets with similar features. The product structure can be divided into one fixed income security and one option. Because of its unique risk/ return profile and innovative product design, ELN has been developing rapidly in overseas market in the past 10 years. Domestic bank started to introduce in China. Everbright Bank's Sunshine Collective Investment Plan B launched in Nov.2004 was a good example. This product is a fixed income RMB fund with return higher than the time deposit. It was quite popular at that time. As domestic security and fund companies have relatively strong theoretical background in financial derivatives, they are keener to drive the development of ELNs.However, domestic commercial banks'usual practice of ELN is to purchase from overseas financial institutions directly. Domestic banks still only serve the role of sales channels. Naturally, the ultimate investment manager is still the overseas financial institutions, and the underlying targets are offshore capital market or stock index, etc. As a result, domestic banks failed to gain experience in product development and investment management, nor domestic investors have the chance to understand the product clearly. Therefore, the purpose of this paper is to facilitate or encourage A-share ELN in China.Market demand of ELNs needs to be further explored by issuers and investors. China's lack of financial instruments cannot satisfy investors with various return/ risk preferences. It further limits new product innovation and development. Moreover, ELN's opportunities are yet to be leveraged with advantages of commercial banks'channel network, trust companies'platform, and security/ fund companies'investment management. Furthermore, ELN's business model remains to be identified. Therefore, it is important that we have to not only study on ELN investment process but also discuss about the potential business model innovation.Every financial product needs issuers'strong commitment and push. ELN in China faces two additional challenges:(1) domestic companies'capabilities in theoretical research, product design, and risk management are simply not enough. (2) business model is not well defined yet. The solutions to these challenges are what the paper is focused. First of all, we study on the structure to try to provide an analytical framework. Secondly, we also learned from real market practice to study how risk can be neutralized. The latter will further help clarify the regulation focus.This paper includes introduction and 6 chapters. First of all, we adopted quantitative & qualitative analysis,theoretical and case studies to conduct thorough analysis on ELN, including aspects of product structure, risk/ return profile, product pricing, and hedging strategy. Only when it is analyzed comprehensively, then we can introduce the innovative product properly. Followingly, we also learned from international market experience. More importantly, we paid special attention to how the risk is transferred or neutralized in order to help regulators focus on the risk control and monitoring.We are still in a very early stage of A-share ELN innovation. This paper is only a start with much remaining to be desired. Further discussions worth exploring include (1) studies on China's relevant regulation framework, accounting system, and tax scheme; (2) studies on the embedded option of ELN. After all, it is the core innovation of the product. Innovation leads to various product structuring. This paper does not have enough research on the topic, but we suggest further analytic topic should follow.
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