Special forms with and without barrier

    A special form of reverse convertibles are the Protect Multi reverse convertibles, which depending on the issuer are also called Multi reverse convertibles Plus. They differ from normal reverse convertibles in that they are based not just on one but on several underlying assets. They also have an additional security mechanism, the barrier, which represents additional protection for the investor.

    At the end of the term, the investor receives the nominal amount of the reverse convertible even if the price of the underlying has fallen below the respective base price during the term, but not the additional barrier. With other special forms such as the Protect Pro Multi reverse convertibles from Vontobel, the investor even gets back the full nominal amount if the price of all underlyings is only listed above the barrier at the end of the term, on the so-called valuation date. The course of the underlying assets during the term is irrelevant in this case.

    If the normal Protect Multi Reverse Convertibles touches or falls below the barrier during the term of just one underlying, it loses its protective function and the security subsequently behaves like a normal reverse convertible with several underlyings. This means that the only decisive factor now is whether the prices of the underlying assets are quoted above the corresponding base prices on the valuation date. If this is the case, the Protect Multi reverse convertible will be redeemed at par. However, if only a single underlying is quoted below its base price, repayment takes place in shares in the form of the shares of the underlying with the worst performance or those that have fallen far short of its base price.

    Since Protect Multi Reverse Convertibles relate to several underlyings, the risk for the investor is greater than when investing in reverse convertibles with just one underlying. Because of the large number of underlyings, the probability that at least one of them will break through the barrier or subsequently be quoted below the strike price increases. Even if the majority of the underlyings were quoted above the strike price throughout the term, the reverse convertible would still be redeemed through the delivery of shares, to the detriment of the investor. It should also be noted that the delivered shares usually come from the underlying that is listed furthest below the base price on the valuation date. Investors thus suffer the greatest possible loss in this case.

    In order to prevent a single underlying asset that runs away in a Protect Multi Reverse Convertible Bond from leading to a loss for the investor, the investor should pay attention to the correlation of the corresponding underlying assets when selecting the security. If, for example, all underlying values ​​come from the same country and the same industry, for example only German car manufacturers, a high positive correlation is expected. This means that it is likely that all underlying assets will move in the same direction. On the other hand, a high negative correlation means that exactly the opposite development is to be expected, which in the case of Protect Multi Reverse Convertibles would mean that it is very likely that at least one underlying will fall below the barrier and strike price. Reverse convertibles with such underlying assets should be avoided in order to make the risk of loss more predictable.