In the last issue of "Leonteq Know-how", we got into participation products by taking a close look at outperformance certificates and looking in detail at the construction and payout profile of these products. In the current Knowledge Newsletter, we now take a detailed look at another sought-after form of this product category.
One of the best-known representatives of participation products is the bonus certificate. The special feature of this structure is that it allows attractive returns even in the case of sideways trending or even moderately declining prices. The bonus is responsible for this. If the underlying does not touch or fall below a predefined barrier during the term, the issuer pays a minimum repayment equal to the bonus level. And that's not all: if the underlying security exceeds the bonus level at maturity, the certificate participates in the gains. However, as soon as the barrier is breached, the partial protection expires and the investment is directly linked to the performance of the underlying.
The zero strike call option is also the foundation for the bonus certificate. As a further component, a down and out put is added, the strike of which corresponds to the bonus level. This option expires worthless as soon as the underlying asset is quoted at or below the barrier during the term. The issuers use the expected dividends from the underlying to finance the option. The higher the dividends, the more capital is available for the purchase of the required options. In this context, the down an out put represents a kind of adjusting screw for the repayment profile. If its strike (bonus level) is set higher, this is at the expense of the risk buffer. If, on the other hand, the issuer wants to achieve the lowest possible barrier, the minimum repayment is reduced.
In practice: Leonteq has launched a bonus certificate on the Roche (Valor: 117180141). The barrier is 69% of the initial fixing. As long as the large cap does not fall to or below this level, the minimum redemption of 112% of the denomination is due in any case at maturity in three years. The bonus is chosen to roughly correspond to Roche's expected dividends during the term. On the share price side, the underlying has recently been one of the weaker performers in the SMI. Should Roche manage an upward turnaround, the bonus certificate would also participate in this beyond the bonus level. A look at the payout diagram illustrates the outlined modalities.
The bonus opportunity of 12% is partially protected by a barrier at 69% of the initial fixing. If Roche starts an upward movement and exceeds the bonus level at maturity, the certificate benefits. The redemption goes up in line with the price increase of the underlying. If, on the other hand, Roche falls by 31% or more and does not recover within 3 years, the investment ends with a loss.
The option-based design makes it possible to combine bonus and outperformance certificates. For this purpose, the issuer uses further options in addition to zero strike call and down and out put. If the product is to contain a cap, call options are written whose strike corresponds to the maximum amount. A bonus outperformance certificate on Roche with cap (Valor: 117180142) completes the product series launched especially for this know-how article. Bonus level (12%) and barrier (69%) correspond to the classic bonus certificate. In addition, the product participates at the end of the three-year term with a rate of 200% in a price increase of Roche exceeding the bonus level. This feature applies up to the cap of 130%, resulting in a maximum redemption of 148% of the denomination.
The Bonus Outperformance Certificate with Cap is particularly versatile. In addition to the partially protected minimum redemption, the product offers the chance of a disproportionate participation up to the cap. Of course, this is not without risk: If Roche breaks the barrier, the investment is exposed to the full setback potential of the underlying.
With all bonus certificates, a deviation from the intrinsic value may occur during the term. In the secondary market, the price of the underlying, the implied volatility and the dividend expectations have an influence on the pricing.
Bonus certificates can be based on several equities or indices, in which case they are referred to as multi bonus certificates. The type of certificate investors choose depends on their personal market expectations and their assessment of the underlying. At the same time, it is important to weigh up one's own risk appetite.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.