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PRODUCT TYPES

COVERED WARRANT PLAIN VANILLA

They come in two types, based on faculty:

  • Covered Warrant plain vanilla Call: it is an exchange-trade security consisting of a securitised call option that bestows on the holder the right (but not the obligation) to purchase, at or by the expiry date, a specific amount of the underlying asset at a predetermined price (strike price) or, in case cash settlement has been fixed, the payment of the positive difference between the current market price and the strike price.

  • Covered Warrant plain vanilla Put: it is an exchange-trade security consisting of a securitised put option that bestows on the holder the right (but not the obligation) to sell, at or by the expiry date, a specific amount of the underlying asset at a predetermined price (strike price) or, in case cash settlement has been fixed, the payment of the positive difference between the strike price and the current market price.

LEVERAGE CERTIFICATES

Certificates that track the performance of the underlying asset with leverage effect. The most common types of leverage certificates are:

  • Stop Loss Bull Certificates: Bull Certificates provide investors with a bullish position on the underlying asset, just paying a fraction of the price of the underlying asset. Buying a Stop Loss Bull Certificates equals, by a financial point of view, to buy the underlying asset and at the same time to borrow from the issuer an amount of money equal to the strike price. On that amount of money the investor pays to the issuer in advance, when the certificate is bought, an interest rate. Stop Loss Bull Certificates are characterized by a stop-loss level (or knock out barrier) on the downside. If the stop-loss level is hit, the Certificate dies before its expiry date.

  • Stop Loss Bear Certificates: Bear Certificates provide investors with a bearish position on the underlying asset, just paying a fraction of the price of the underlying asset. Buying a Stop Loss Bear Certificates equals, by a financial point of view, to short-sell the underlying asset and at the same time to make a deposit by the issuer of an amount of money equal to the strike price until the expiry of the certificate. Depending on the rules governing the certificate, the issuer may pay or not the investor an interest rate on the deposited money. In the first case the positive interest is discounted wholly and in advance from the price of the Bear Certificate. Stop Loss Bear Certificates are characterized by a stop-loss level (or knock out barrier) on the upside. If the stop-loss level is hit, the Certificate dies before its expiry date.

  • Stop Loss Bull Certificates R: they are like classic Stop Loss Bull Certificates, with the exception that their strike price and stop loss level are periodically adjourned; daily the strike price and monthly the stop loss level. The interests that the investor pays wholly and in advance to the issuer when a classic Bull Certificate is bought, are here accrued daily to the strike price. The stop loss level is adjourned monthly so that the percentage gap between stop loss level and strike price remains unchanged.

  • Stop Loss Bear Certificates R: they are like classic Stop Loss Bear Certificates, with the exception that their strike price and stop loss level are periodically adjourned; daily the strike price and monthly the stop loss level. The interests that the issuer may pay wholly and in advance to the investor when a classic Bear Certificate is bought, are here accrued daily to the strike price. The stop loss level is adjourned monthly so that the percentage gap between stop loss level and strike price remains unchanged.

 

INVESTMENT CERTIFICATES

Investment certificates are financial instruments that track the performance of the underlying asset without leverage effect. They come in two types: derivative securities that follow linearly the underlying asset (e.g. Benchmark and Quanto Certificates) and certificates that add to that basic structure one or more accessory options (e.g. Discount, Equity Protection and Structured Certificates).

  • Benchmark Certificates: Benchmark certificates are financial instruments that follow linearly the performance of the underlying asset. They are normally issued on underlying assets that are not easily accessible to retail investors, such as indices, exchange rates, futures on oil, gold, silver and other commodities. All securitised derivatives are priced, traded and settled in euro, even if the underlying asset is priced in a different tender, for instance USD. In this case the investor is exposed to the exchange rate risk. To cover that risk, there is a special category of benchmark certificates, called Quanto, whose underlying asset is always priced in euro, no matter which is the original tender. These instruments allow the investors to neutralize the effect of the floating exchange rate.

  • Discount Certificates: Discount Certificates allow investors to replicate the performance of the underlying asset at a discount compared to the actual underlying price. The discounted price of this investment certificate is due to the selling of a call option on the same underlying asset. This implies that the tracking of the performance of the underlying is capped by the strike of the call.

  • Equity Protection Certificates: Equity Protection Certificates allow investors to protect partially or completely their investment in case of a downside movement of the underlying. They also allow a participation (normally expressed in percentage up to 100%) to upside positive movements of the underlying asset. This product is thought mainly for investors who want to reduce their risk exposure to downside movements of the underlying more than for investors who have bullish expectations on the underlying.

STRUCTURED/EXOTIC COVERED WARRANTS: Covered Warrants whose main component is a combination of call and/or put and/or exotic options. Exotic options can be defined as non-standard derivatives with complex payoff structures that are usually aimed to satisfy specific needs of the investors. The most common types of structured/exotic covered warrants are the following ones:

  • Digital Covered Warrants: the issuer pays the investor a predetermined amount of money (rebate) if the underlying asset reaches a certain level.

  • Corridor Covered Warrants: the issuer pays the investor a predetermined amount of money (rebate) if the underlying asset in a certain day (or interval of days) is inside a predetermined range.

  • Rainbow Covered Warrants: the underlying asset consists of two or more assets (shares, indices). This type of structured covered warrants allows the investor to profit from a better performance of one of the two underlying assets against the other. The price of a rainbow is not only influenced by the underlying assets’ volatility but also by their correlation.

  • Call Spread Covered Warrants: it is a derivative security whose payoff replicates the strategy of acquiring a call option with a low strike and at the same time the sale of another call option on the same underlying and with the same expiry date but with a higher strike. This instrument allows the holder to benefit from a positive performance of the underlying with a cap represented by the higher strike price. Compared to a classical call option with potentially unlimited payoff, this derivative has a lower price.

  • Put Spread Covered Warrants: it is a derivative security whose payoff replicates the strategy of acquiring a put option with a high strike and at the same time the sale of another put option on the same underlying and with the same expiry date but with a lower strike. This instrument allows the holder to benefit from a negative performance of the underlying with a cap represented by the lower strike price. Compared to a classical put option with potentially unlimited payoff, this derivative has a lower price.

  • Covered Warrant Straddle: it is a derivative security whose payoff replicates that of a combination of a long call plus a long put both on the same underlying, and with the same strike price and expiry date. Investors in a straddle have a neutral position in relation to the market trend and make a profit in case of wide swings of the underlying (i.e. volatility strategy), regardless of the direction of the movements.

  • Covered Warrant Strangle: it is a derivative security whose payoff replicates that of a combination of a long call plus a long put that is on the same underlying and with the same expiry date of the call option but with a lower strike price. Investors in a strangle have a neutral position in relation to the market trend and make a profit in case of wide swings of the underlying (i.e. volatility strategy), regardless of the direction of the movements (over the call strike or below the put strike).

  • Covered Warrant Knock Out: it is a derivative security that expires before the predetermined expiry date if the underlying price reaches a certain level (called barrier). Covered Warrant Knock Out can also pay a pre-specified amount when the barrier is knocked (Rebate Covered Warrant).

Last update:  December 12 2012 - 11:45


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