Structured Products in Wealth Management by Wohlwend Hanspeter

Author:Wohlwend, Hanspeter...
Language: eng
Format: epub
Published: 2014-06-27T00:18:10.411000+00:00

Further product developments

The compensation for waiving potential profit can also be used to finance partial capital protection, thereby creating a “step certificate.”

Step certificates

In addition to partial capital protection, step certificates offer the chance of a maximum return. They are hybrid products comprising both maximum return and capital protection features. Step certificates are often structured symmetrically, combining, for instance, capital protection up to –15 percent with exposure to a positive price development up to +15 percent. If the underlying falls in value by more than the 15 percent hedged, repayment of the capital is no longer fully guaranteed. The participation rate increases more sharply, once –15 percent is reached. Figure 2.19 shows the payoff profile for a step certificate on the NASDAQ-100 Index with a time to maturity of one year.

While it is easy to determine the repayment amount when prices are rising, further explanation is required to calculate the repayment when prices are falling sharply. If, for example, the index drops by 30 percent to 1,330 points, then the return on the step certificate is –17.6 percent ((15 percent – 30 percent) × 1.176 = –17.6 percent). The first part of the calculation (15 percent – 30 percent) produces the difference between the index and the protection threshold (–15 percent). The factor 1.176 is the reciprocal value of the protection threshold (1/0.85).

Figure 2.20 displays the returns on a step certificate compared with those on the underlying index.

The basic building block of a step certificate is a LEPO. The partial capital protection provided by a step certificate is secured by purchasing an at-the-money put option. This is financed by selling a call option with a strike of 115 percent, as well as the sale of 1.176 put options with a strike of 85 percent. The 1.176 put options sold correspond to the reciprocal value of the put option’s strike.

Figure 2.19 Payoff profile for a step certificate

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