Discount certificate
A discount certificate (also known as a discounter ) is a certificate with a derivative component that grants a capped participation in the performance of the underlying asset in the form of a forward transaction . Due to its derivative component, it is counted among the financial derivatives and is generally intended for private investors .
Discount certificates can be issued on any base value , mainly stocks , indices and commodities traded on the stock exchange . They are issued by banks and represent an alternative to direct investments in the respective underlyings. The certificates can usually be traded on the stock exchange or also in over-the-counter trading directly with the issuer .
history
The invention of discount certificates goes back to Thomas Zwirner, employee at HSBC Trinkaus . In 1995 he had the idea of copying an investment strategy that had previously only been used by professional investors and securing it for the first time in a paper. However , Zwirner did not register the name discount certificate as a trademark.
As the Stuttgart Stock Exchange announced in December 2007, discount certificates are now the strongest investment group among investment certificates, with a market share of over 46 percent, even ahead of bonus certificates .
functionality
The buyer of a discount certificate participates in the performance of the underlying, but at the same time foregoes price increases above a fixed amount, the cap . He receives for this waiver a tee (English discount ) d. H. the certificate is always a little cheaper than the base value.
The buyer of the discount certificate does not acquire the base value, but, since it is a forward transaction , the right to tender the base value or to receive a cash settlement at the end of the term. Thus, the investor does not receive any dividend payments and no voting rights with a discount certificate . The dividend mostly flows back into the certificate indirectly through the proceeds from the call sale (see section Construction ).
Because of the short call position, the discount certificate is one of the writer transactions . The investor benefits from the pure lapse of time even without price movement, as this causes the fair value of the call option whose premium he has previously received to expire.
The subscription ratio of the certificates is i. d. Usually chosen so that the price has a size that can be traded for small investors, typically up to around € 100. In the case of stock indices with scores in the thousands, e.g. Subscription ratios of 1: 100 are common, for example the DAX or Dow Jones.
example
There are two possible cases for the due date:
- The base value is quoted below the cap: the buyer receives the market value
- The underlying is quoted at or above the cap: the buyer receives the cap
To compensate for the capped, achievable increase in value, a discount certificate is cheaper than its base value. For an underlying with a current price of 100 euros, the “fair price” of a discount certificate due in 18 months and constructed with a cap of 110 euros is around 93 euros - a “saving” of 7% compared to a direct investment in the underlying. This calculation is based on an implied volatility of 20% and a risk-free return of 3%.
Various investment approaches can be implemented with discount certificates by choosing the cap. As an example, the achievable returns are discussed for three different cap ranges depending on the underlying at the end of the term (current price of the underlying is 100 euros, parameters for implied volatility, term and risk-free return as above):
Position of the cap | Effects on the return |
---|---|
50–60 euros | The certificate is trading well in the money . Low risk of loss, limited return. Fixed deposit replacement . The buyer receives a high discount on the price of the underlying asset. The cap is only slightly above the purchase price, and at the same time well below the price of the underlying, so it is very likely that it will be exceeded at the end of the term. As a result, both the possible return and the risk of loss are very limited. |
95-105 euros | The certificate is written on the money . Average return and risk of loss. Even if the price of the underlying asset stagnates, the investor receives an attractive return that is above the risk-free return. The loss zone begins when the underlying falls below the purchase price of the certificate at the end of the term. With a fair purchase price, this should be around 15% or 10% (with a cap of 105 euros) below the base value at the time of purchase. If the underlying is quoted above 100 * cap / purchase price at the end of the term, direct investment in the underlying would have been better. |
130-140 euros | The certificate is quoted way out of the money . High possible return, increased risk of loss. Tracker certificate replacement. The buyer only receives a small discount on the price of the underlying asset. On the other hand, he benefits more from possible price increases, since the cap is far above the price of the underlying and is rarely exceeded. At the same time, the risk is increased as the low initial discount hardly mitigates price losses of the underlying. |
construction
Discount Certificates can be constructed with all underlying assets on which options are issued. Typically these are indices, stocks or commodities.
In order to construct a discount certificate, the issuer either purchases the underlying asset directly or a zero strike call on the same. At the same time, he sells a call option on the underlying asset (short call), whereby the exercise price of the call corresponds to the cap of the certificate. Since the call option is covered by the underlying or the zero strike call, this is also referred to as a covered call . The sales proceeds achieved through the sold call option are largely the amount or discount by which the discount certificate is compared to is cheaper than the underlying.
There are two different scenarios for the end of the term of the call option:
- If the price of the underlying is below the cap, the buyer of the option will not exercise it and the underlying is offered to the buyer of the certificate, who is indirectly the seller of the call option. H. booked into his securities account.
- If the price of the underlying is at or above the strike price, the buyer of the call option will exercise the option and demand the shares. Thus, the buyer of the certificate receives the maximum possible profit through cash settlement.
As a reverse convertible
In this procedure for the certificate structure is a zero coupon bond (zero coupon bond) bought and also sold a put option. The discount compared to the underlying is made up of the interest on the zero bond and the sales proceeds from the put option.
variants
Deep discount certificate
A discount certificate with a large gap between the cap and the current price of the underlying asset. On the other hand, the current value of the certificate is very close to the cap and the possible profit is significantly lower than for discount certificates with a lower discount.
Rolling discount certificate
The Rolling Discount Certificate product has been around since 2002 . In contrast to classic discount certificates, rolling discount certificates represent a fringe group within the certificate landscape. The available underlyings are limited to a few market indices such as DAX or EuroStoxx 50, shares of large companies are rarely used as underlyings. While a classic discount certificate has a fixed term, which can vary between a few months and several years, a rolling discount certificate has an unlimited term. The motivation behind such a product is as follows: If an investor decides to use discount certificates as a long-term investment, he must replace an expired discount certificate with a new one. The issuer of a rolling discount certificate relieves the investor of this process. The cap for the new discount certificate is repeatedly adjusted to the current price of the underlying.
In practice, discount certificates with a term of one to three months are iterated, the caps of which are close to the current price of the underlying. According to the issuer's sales prospectuses, the advantage of these products over the classics is that they react better to short-term market fluctuations and that investors save time and money if they do not have to carry out the new investment themselves. However, there is an annual management fee for this service, some of which is not insignificant.
Differentiation from discount calls and puts
Discount calls and puts are exotic warrants ; they are not to be confused with discount certificates .
Compared to direct investment in the underlying
The most noticeable difference compared to direct investments is the yield profile. In contrast to the underlying, the discount certificate has an asymmetrical return profile: the maximum profit is limited by the cap, with price losses being reflected almost 1-to-1 with increasing size and e.g. B. in a bankruptcy can also end in a total loss. In return, the investor receives a discount on the market value, which means that he buys a risk buffer. The price of the underlying can fall to the discounted cost price before the investor suffers losses. Also, a loss with the discount certificate due to the discount is generally lower than with the underlying.
A discount certificate therefore always generates an excess return compared to the base value if the base value is above the purchase price of the certificate and below the cap at the end of the term. In practice, this means that in a scenario in which the investor expects only slight price changes at the end of the term, a discount certificate is an option.
advantages
- Discount on the price of the underlying, which means that profits can still be made to a certain extent even if the price of the underlying falls
- Writer position, the passage of time produces a return
- Falling implied volatility in the underlying leads to an increase in the value of the certificate
disadvantage
- asymmetrical risk-reward profile, no participation in prices that rise above the cap
- Issuer risk, the payment of the certificate depends on the liquidity of the issuer (as in the case of the insolvency of Lehman Brothers on September 15, 2008)
- Prices are usually determined by the issuer and not by supply and demand
- Increasing implied volatility in the underlying leads to a loss in the certificate
- no voting rights for shares as an underlying
See also
Web links
Individual evidence
- ↑ Arne Storn: The factory of the certificates . In: The time . No. 21 , 2004 ( online ).
- ^ Karen Schmidt: Issuer portrait: HSBC Trinkaus. In: dasInvestment.com. February 1, 2008, accessed August 8, 2008 .