Mastering Strike Levels in Structured Products and Certificates

The strike level determines the price at which the underlying asset is delivered to the investor or the cash settlement value, depending on the specific product and the investor’s preference.

By comprehending the intricacies of strike levels in these products, investors can make well-informed decisions that align with their investment goals and risk tolerance.

The significance of Strike Levels in popular structured products like Barrier Reverse Convertibles, Bonus Certificates, Reverse Convertibles, and Discount Certificates. Understanding the role of Strike Levels in determining payouts and risks is crucial for informed investment decisions in these financial instruments.

Barrier Reverse Convertibles, Bonus Certificates, Reverse Convertibles, and Discount Certificates are popular types of structured products, each with distinct characteristics.

The Strike Level plays a crucial role in determining the payout and risks associated with these products. This article will examine the significance of the Strike Level in these financial instruments.

Strike Level for Barrier Reverse Convertibles and Bonus Certificates

In Barrier Reverse Convertibles and Bonus Certificates, the Strike Level is a critical parameter determined by the option component. It serves as a reference price, dictating the terms of the underlying asset’s delivery to the investor in specific scenarios.

Barrier Reverse Convertibles (BRC) are structured products that offer investors a fixed income stream through coupon payments, provided the underlying asset’s price remains above a predetermined barrier level during the product’s lifetime. If the price touches or falls below the barrier level, the investor will receive the underlying asset or a cash equivalent at the Strike Level. The Strike Level, in this case, represents the worst-case scenario for the investor.

Bonus Certificates, on the other hand, are structured products that offer investors the potential for capital appreciation by paying a bonus amount if the underlying asset’s price remains above the barrier level throughout the product’s term. If the price touches or falls below the barrier level, the investor will receive the underlying asset at the Strike Level or its cash equivalent, depending on the product’s terms.

The Strike Level for both Barrier Reverse Convertibles and Bonus Certificates determines the price at which the underlying asset is delivered to the investor in the event of a barrier touch. If the settlement is in cash instead of physical delivery, the Strike Level dictates the cash amount based on the price of the underlying asset at expiry.

Strike Level for Reverse Convertibles and Discount Certificates

The Strike Level also plays a crucial role in determining the payout and risks associated with Reverse Convertibles and Discount Certificates. Both these structured products incorporate a put option, exposing investors to the risk of a declining asset price.

Reverse Convertibles are structured products that offer investors a high coupon payment, assuming the underlying asset’s price remains above the Strike Level during the product’s term. If the underlying asset’s price falls below the Strike Level at maturity, the investor will receive the underlying asset at the Strike Level or its cash equivalent. This scenario can result in a potential capital loss for the investor.

Discount Certificates, in contrast, provide investors with an opportunity to purchase an underlying asset at a discounted price. If the asset’s price is above the Strike Level at maturity, the investor benefits from the discount. However, if the price falls below the Strike Level, the investor will receive the underlying asset at the Strike Level or its cash equivalent, effectively eliminating the discount advantage.

For both Reverse Convertibles and Discount Certificates, the Strike Level determines the price at which the underlying asset is delivered to the investor if the asset’s price is below the Strike Level. If the settlement is in cash instead of physical delivery, the cash amount is based on the price of the underlying asset at expiry.

The Strike Level is an essential aspect of Barrier Reverse Convertibles, Bonus Certificates, Reverse Convertibles, and Discount Certificates, as it influences the potential payouts and risks associated with these structured products.

Understanding the implications of the Strike Level and the scenarios in which it affects the product’s performance is crucial for investors considering structured products as part of their investment portfolio.

Examples illustrate interesting scenarios where the Strike Level significantly impacts the payout and risks associated with various convertible certificates :

1. Barrier Reverse Convertible with a high barrier and high coupon rate: Consider an investor who purchases a Barrier Reverse Convertible (BRC) with a high barrier level and a high coupon rate. In this scenario, the underlying asset’s price must remain above the barrier level for the investor to receive the coupon payments. If the underlying asset’s price stays above the barrier, the investor benefits from a high return through coupon payments. However, if the asset’s price falls below the barrier level, the investor receives the underlying asset or cash equivalent at the Strike Level, potentially resulting in a capital loss.
2. Bonus Certificate with a narrow range between the barrier and the bonus level: Imagine an investor who purchases a Bonus Certificate with a relatively small difference between the barrier level and the bonus level. In this case, the investor will receive the bonus payment and the initial investment if the underlying asset’s price remains above the barrier level throughout the product’s term. If the price falls below the barrier level but remains above the Strike Level, the investor still recoups their initial investment. However, if the asset’s price falls below the Strike Level, the investor receives the underlying asset at the Strike Level or its cash equivalent, which could result in a loss.
3. Reverse Convertible with a low Strike Level and a high coupon rate: An investor buys a Reverse Convertible with a low Strike Level and a high coupon rate. If the underlying asset’s price remains above the Strike Level during the product’s term, the investor benefits from the high coupon payment. However, if the asset’s price falls below the Strike Level at maturity, the investor receives the underlying asset at the Strike Level or its cash equivalent, exposing them to a potential capital loss.
4. Discount Certificate with a Strike Level close to the market price: In this example, an investor purchases a Discount Certificate with a Strike Level that is close to the current market price of the underlying asset. If the asset’s price remains above the Strike Level at maturity, the investor benefits from purchasing the asset at a discount. However, if the asset’s price falls below the Strike Level, the investor receives the underlying asset at the Strike Level or its cash equivalent, which essentially eliminates the discount advantage.