Cost transparency is an important touchstone when buying structured products. This is because the costs provide information on what a certificate actually costs and thus serve to protect investors. Moreover, the expected return can only be determined with certainty if all the facts are on the table. In the last issue of "Leonteq Know-how", we already looked at the factors influencing the conditions when structuring. In the current issue, we now take a closer look at the effects of various variables from the issuance to the secondary market price.
Basically, there are different ways when and how investors acquire a structured product. Yield enhancement products are often purchased or subscribed to immediately upon issuance. Two cost points can arise in the process: Firstly, possible sales commissions of the issuer, and secondly, potential entry and exit costs. However, both factors are listed separately in the respective issue terms and conditions, so that first-time subscribers need not fear any negative surprises.
Even before the issue is launched, the initial fixing takes place. Two types can be distinguished here: Firstly, live fixing, and secondly, closing. In practice, the latter is the most common. Usually, the subscription period (primary market) ends during the day and the fixing for the product then takes place at the closing price of the underlying. In the case of a barrier reverse convertible, for example, the strike price, the barrier and, if applicable, the coupon trigger and autocall trigger levels are derived from this initial fixing.
Before the first official trading day, it is possible in individual cases to trade the new product directly with the issuer in advance in the gray market. The product then enters the secondary market. This is where most of the capital exchange of products in circulation takes place. This may be an exchange such as the SIX Swiss Exchange or BX Swiss. However, direct trading with the issuer is also possible without a listing on an exchange. In both cases, pricing is usually carried out by the issuer as market maker. The issuer provides bid and ask prices on each trading day and also sufficient liquidity. Caution: In the event of market disruptions or extraordinary events, trading may be suspended by the market maker. These can be technical malfunctions, the suspension of the underlying as well as extraordinary market movements.
Pricing, in turn, can be "clean" or "dirty" for products that have a coupon, such as barrier reverse convertibles. The question of "clean" or "dirty" is whether or not the bid and ask prices quoted include accrued interest. This is the interest that has accrued since the last coupon date. For example, if a BRC pays a coupon of 5.00% on a nominal of 1,000 Swiss francs every January 1, the accrued interest in the middle of the year on July 1 is approximately 25 francs.
If the price of the BRC is now quoted "clean", this does not include any accrued interest. In this case, investors must find out for themselves how much it is. It is much easier with so-called dirty pricing, where the interest is already included in the price. At first glance, a BRC with "clean" pricing costs less on the stock exchange than with dirty pricing. However, if accrued interest is included, the two securities are of equal value. Investors wishing to compare different products must therefore find out in advance about the method of pricing. Classic BRCs are usually priced "clean", whereas the price of callable variants is often quoted "dirty".
We went into detail about the influence of the individual parameters on the design of a yield enhancement product in the primary market in the last issue "Leonteq Know-how"-Part 3. Below is a brief review: In addition to the level of volatility, i.e. the fluctuation intensity of the underlyings, interest rate development, dividend expectations as well as the term play an important role in determining the conditions. Speaking of maturity: In principle, a decreasing remaining term in the secondary market has a positive effect on a barrier reverse convertible, i.e. in the form of rising prices, as long as the barrier is intact. The reason for this is the decreasing probability of a breach of the safety threshold. In the event of a barrier breach, however, this positive time value effect is hardly evident in the final weeks of the term. If the underlying approaches the barrier, the probability of contact increases again and this has a negative effect on the product price.
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.