Guaranteed / Protected Capital
Capital-protected products offer a guaranteed repayment of principle (upon maturity) as well as the opportunity to participate in price gains of the underlying instrument. However, owing to the guarantee, the participation rate is normally lower than what you’d realize by owning the underlying security outright.
This products enable you to participate disproportionately in price advances in the underlying instrument if it trades higher than a specified threshold value. To that purpose, these certificates are equipped with a strike price and a participation factor. The participation factor kicks in only once the strike price has been exceeded and most often lies – depending on the term to maturity and underlying instrument – between 120 and 200 percent. In return, you waive the right to receive dividends on the underlying instrument.
Reverse convertibles are among the most popular risk-optimization products in Switzerland and are suited above all for investors who are anticipating a sideways or slightly upward trending market.
The economic nuts and bolts of reverse convertibles correspond precisely to those of discount certificates, the only difference being that with a reverse convertible you earn income during its entire term in the form of coupon payments. While those returns are considerably higher than the yields to be had in the bond market, reverse convertibles carry a higher risk than bonds because repayment of the principle amount is not guaranteed.
These instruments allow investors to leverage rising (long) or falling (short) prices. The selected leverage, which is constant on a daily basis, grants disproportionately high participation in price changes in the underlying. Unlike knock-out warrants and mini-futures, constant leverage certificates do not have a knock-out barrier.