How do Reverse Bonus Certificates work?
When constructing a reverse bonus certificate, the issuer combines a long position in a put with a strike price of 100 (this theoretical put represents a short position in a stock) and a long position in a special form of a call option. In contrast to the classic call, this call up and out is equipped with a barrier. If this is violated, this exotic call immediately becomes worthless. Due to this restriction, the call up and out is significantly cheaper than the classic call option with the same base price.
The base price of the call up and out corresponds to the bonus level of the certificate, its barrier defines the barrier of the reverse bonus certificate. Since the discounted dividends of a share or an index – unlike a bonus certificate – increase the price of a reverse bonus certificate, a reverse bonus certificate can only be issued without a significant premium if interest rates are very high.
If the share then trades below the bonus level on the valuation date, the call up and out has no intrinsic value, so that the difference between the reverse level and the price of the underlying alone is decisive for the repayment amount of the reverse bonus certificate. This is represented by the value of the put with a strike price of 100 (very positive scenario).
If, on the other hand, the underlying trades above the base price (positive scenario), around EUR 52, then the call up and out has an intrinsic value of EUR 12. This results from the difference between the actual share closing price and the base price (= 52 euros – 40 euros) and of course only exists as long as the barrier is intact.
If the barrier of the call up and out is breached during the observation period, this call immediately expires worthless. Now the repayment amount depends solely on the put strike 100, whose intrinsic value on the valuation day always corresponds exactly to the difference between the reverse level and the closing price of the share. Even if the barrier is breached, a positive return is still possible, but investors must assess individually to what extent a price slump appears likely after breaching the high barrier in the remaining term. For a neutral scenario, the underlying must then actually fall to the level of the purchase price of the certificate, for a positive scenario even close below.
Important: A special feature of the Reverse Bonus Certificate is its high sensitivity to share prices that are approaching the still intact barrier of EUR 65 – this applies in particular shortly before the end of the term. If the share price is around EUR 64.95 on the valuation date, a small price movement decides whether investors get back around EUR 35 or the bonus amount of EUR 60. The closer the stock price gets to the barrier, the more likely it is that it will be breached. At the same time, the value of the call up and out is at its maximum just before the still intact barrier.