Product Description & Functionality

Capital protection products allow investors to hedge against falling prices. The capital protection typically ranges between 90% and 100% of the nominal value of the product and is valid at maturity. As with bonds, price fluctuations may occur during the term. The upside potential of capital protection products is generally lower than with other products and can be limited. However, investors have the ability to generate a significant return without for going capital protection. In addition to the guaranteed redemption, capital protection products with participation confer a participation in the price increase of the underlying.

Features

• At maturity, the investor will receive at least the amount of the capital protection
• Capital protection is expressed as a percentage of the nominal value (e.g. 100%)
• Capital protection refers only to the nominal value and not the purchase price
• The value of the product may fall below the capital protection during the term
• Participation in the price increase of the underlying from the strike price

Participation and Cap

Definition of Participation: The participation rate defines how strongly the investor profits from the price gain of the underlying as per maturity.

Definition of Cap: Structured products are sometimes provided with a cap. Although this limits the investor’s return potential, it allows more attractive conditions for sideways-trending or only slightly rising prices.

Market Expectations

• Increasing underlying
• Increasing volatility
• Large price setbacks of the underlying possible

Advantages and Risks

Advantages

• Capital protection at maturity
• Participation in the positive performance of the underlying

Risks

• Issuer exposure risk
• The capital protection is valid only at maturity
• During the term, the value of the product depends on various factors (including volatility and interest rates) and can also decline below 100% of the denomination.

Product Description & Functionality

A Reverse Convertible (RC) is based on one or more underlyings and pays a guaranteed coupon. At maturity, the nominal value is paid back in full if the closing prices of the underlyings are above the strike. Otherwise, the worst-performing underlying is delivered, whereby the cost price is equal to the strike. In this case, this would result in a significant discount compared with the starting level.

Features

• If the underlying closes at or below the strike at maturity, the underlying or the cash settlement will be delivered
• If the underlying is above the strike at maturity, the nominal is paid back
• The coupon is guaranteed and paid out independently of the performance of the underlying
• Lower risk of loss compared with a direct investment in the underlying
• Multiple underlyings (“worst-of”) allow higher coupons or lower strikes, but come with a higher level of risk
• Maximum yield is limited (cap)

Softcall vs Autocall

Softcall. If a Reverse Convertible comes with a Softcall function, the issuer of the product is able to, but does not have to, repay the nominal value (in full), plus a pro-rata coupon, on predetermined observation dates.

Autocall. If a Reverse Convertible comes with an Autocall function, the issuer of the product is obliged to repay the nominal value (in full), including a pro-rata coupon, provided that all the underlyings close above the predefined Autocall trigger.

Market Expectations

• Underlying trending sideways or slightly rising
• Decreasing volatility
• Closing price above the strike

Advantages and Risks

Advantages

• The guaranteed coupon is paid out independently of the performance of the underlyings
• No barrier
• Monitoring only at maturity
• Limited capital protection up to the strike

Risks

• Issuer exposure risk
• No guaranteed capital protection
• The maximum yield is limited to the coupon and no dividends are paid out

Product Description & Functionality

Barrier Reverse Convertibles (BRCs) are based on one or more underlyings and pay a guaranteed coupon during their term. At maturity, the nominal value is paid back in full as long as none of the underlyings touched their barrier level (US Barrier) or none of the underlyings close at or below their barrier level (EU Barrier). Otherwise, the capital is converted into a predetermined number of shares of the worst performing underlying (conversion ratio), unless all underlyings close above their strike at maturity.

Features

• If the barrier is never touched, the total amount (nominal), plus the coupon, are paid back
• If the barrier is touched, the product will become a reverse convertible
• The coupon is paid out independently of the performance of the underlying
• Lower risk of loss compared with a direct investment in the underlying
• Multiple underlyings (worst-of) allow higher coupons or lower barriers, but come with a higher level of risk
• Maximum yield is limited (cap)

Softcall vs Autocall

Definition of Softcall. If a Barrier Reverse Convertible comes with a Softcall function, the issuer of the product is able to, but does not have to, repay the nominal value (in full), plus a pro-rata coupon, on predetermined observation dates.

Definition of Autocall. If a Barrier Reverse Convertible comes with an Autocall function, the issuer of the product is obliged to repay the nominal value (in full), including a pro-rata coupon, provided that all the underlyings close above the predefined Autocall trigger.

Market Expectations

• Underlying trending sideways or slightly rising
• Decreasing volatility
• The underlying will not touch or fall below the barrier during the term

Advantages and Risks

Advantages

• The fixed coupon is paid out independently of the performance of the underlyings
• If none of the underlyings touch the barrier, no losses will occur

Risks

• Issuer exposure risk
• No guaranteed capital protection
• The maximum yield is limited to the coupon and no dividends are paid out

Product Description & Functionality

Outperformance Certificates allow investors to participate in the performance of an underlying – and if the underlying performs positively, they can even do so disproportionately. If the price of the underlying at maturity is beneath the starting level, the certificate replicates its performance on a one-to-one basis. Should the underlying be quoted above the starting level, however, investors enjoy disproportionately high price gains with the Outperformance Certificate. There is no cap on the maximum repayment price for an Outperformance Certificate. The exact level of the outperformance is determined by the participation rate. In return, investors forgo any dividends.

Features

• Disproportionate participation (outperformance) in the positive performance above the strike
• Reflects the performance of the underlying beneath the strike on a one-to-one basis
• Risk corresponds to that of a direct investment in the underlying
• Forgoing of dividends
• The participation rate applies on maturity. The participation rate may be lower during the term

Market Expectations

• Increasing underlying
• Increasing volatility

Advantages and Risks

Advantages

• Unlimited over-participation in the positive performance of the underlying (Outperformance Certificate without cap)
• Over-participation in the positive performance of the underlying up to the cap (Outperformance Certificate with cap)

Risks

• Issuer exposure risk
• Same loss potential as with a direct investment in the underlying (dividends not taken into account)
• If the underlying performs negatively during the term, the Outperformance Certificate can be quoted below the issue price

Product Description & Functionality

Bonus Certificates allow participation in the performance of the underlying. This product features a full and unlimited participation in the performance of the underlying and can provide an enhanced return compared with a direct investment in the underlying under slightly negative market conditions. If the barrier is never touched, the investor receives the higher of a) the bonus level and b) the positive performance of the underlying at maturity. The entitlement to the bonus level / bonus yield lapses only if the barrier is touched. The Bonus Certificate then corresponds to a Tracker Certificate and the investor participates in the performance of the underlying on a 1:1 basis.

Features

• Unlimited participation in the upside of the underlying on the expiration date
• Minimum redemption equal to the bonus level (strike) if no barrier event has occurred
• Outperformance compared with a direct investment in the underlying, if the expiration value of the underlying plus any dividends paid thereon is lower than the strike level and no barrier event has occurred.
• If the barrier is touched, the product becomes a Tracker Certificate
• Multiple underlyings (Worst-of) allow higher bonus levels or lower barriers at higher risk

Bonus Certificate Variants

Capped Bonus Certificate: The difference relative to a conventional Bonus Certificate is formed by the cap; i.e. the limit on earnings potential (maximum yield).

Bonus Outperformance Certificate: Bonus Outperformance Certificates allow clients to participate disproportionately in the positive performance of the underlying on maturity.

Market Expectations

• Underlying trending sideways or rising
• Underlying will not touch or breach barrier during the lifetime of the product

Advantages and Risks

Advantages

• If the Underlying closes at or above the Strike Price (Bonus Level) on the Expiration Date, the investor will benefit without limitation from the upside performance of the underlying, as long as no barrier event has occured.
• Guaranteed bonus level provided the barrier is not touched or fallen below

Risks

• Issuer exposure risk
• No conditional protection is offered if a barrier event has occurred.
• The product may still benefit from any increase of the underlying value, but the product may incur losses if the underlying decreases in value.
• Investor gives up current income (dividends)