Yield enhancement
Yield enhancement products – how they work
While reverse convertibles come with a guaranteed coupon, discount certificates can be purchased at a price lower than that of the underlying security. The maximum returns with reverse convertibles and discount certificates are equally high if both products are based on the same underlying security and have identical strike prices and expirations. Depending on how the price of the underlying security develops, at the expiration date there is a repayment of the invested amount or a delivery of the underlying security.
Reverse convertible / discount certificate
The diagram illustrates the payment profile, which is identical for a reverse convertible and a discount certificate.
Yield enhancement is the right investment solution if you
want to pursue a yield-oriented investment strategy
are looking for an alternative to direct investments
expect that the underlying security will trade sideways or slightly higher
Due to the optimized returns in sideways tending markets, you can participate in sharply rising prices of the underlying security only to a limited extent.
Reverse Convertibles | Diskont-Zertifikate | |
|---|---|---|
Construction | Bond and sale of a put option | Underlying security and sale of a call option |
Repayment at expiry | The repayment is determined by the price of the underlying security. You receive the coupon in all cases. | The repayment is determined by the price of the underlying security. If at expiry the underlying is trading at or above the strike price, you receive repayment of the discount certificate at the strike price. |
Barrier reverse convertibles
Barrier reverse convertibles (Julius Baer's designation: ICE units with a knock-in) behave in a similar fashion to reverse convertibles except that they include a risk buffer. However, if the price falls below a predefined level or hits the barrier, the product converts into a normal reverse convertible.
Multi Barrier Reverse Convertible
One variant of the barrier reverse convertible is the multi barrier reverse convertible (Julius Baer's designation: double, triple, quadruple and quintuple ICE units). Here the products are based on multiple underlying securities, and that structure allows higher coupons or a lower barrier but with higher risks.