How do bonus certificates work?
When constructing a bonus certificate, the issuer (e.g Vontobel*, Societe Generale* or HSBC) a long position in a call with a strike price of 0 (call strike 0 – this only theoretical call represents only a share minus its discounted dividend and cannot be traded in this form on a futures exchange) and a long position in a special form a put option. In contrast to the classic put, this so-called Put Down and Out is equipped with a barrier. If this is violated, this exotic put immediately expires worthless. Due to this restriction, the put down and out is significantly cheaper than the classic put option with an identical exercise price.
The base price of the put down and out corresponds to the bonus level of the certificate, its barrier defines the barrier of the bonus certificate. This means that the higher the bonus amount, the smaller the risk buffer, since the issuer only has a certain amount at its disposal, namely the discounted dividend of the share or the index, to finance the bonus mechanism.
If the share trades above the bonus level on the valuation date, the put down and out has no intrinsic value, so that the price of the underlying alone is decisive for the repayment amount of the bonus certificate. This is represented by the value of the call strike 0.
If, on the other hand, the underlying trades below the base price, around EUR 48, then the put down and out has an intrinsic value of EUR 12. This results from the difference between the base price and the actual closing price of the share (= 60 euros – 48 euros) and of course only exists as long as the barrier is intact.
If the barrier of the put down and out is breached during the observation period, the put immediately expires worthless. Now the repayment amount depends solely on the call strike 0, the intrinsic value of which always corresponds exactly to the closing price of the share on the valuation day. Even if the barrier is breached, a positive return is still possible, but investors must individually assess the extent to which a price rise appears likely after the barrier has been breached in the remaining term. For a neutral scenario, the base value must then actually rise to the level of the purchase price of the certificate, for a positive scenario even higher.
Tip: A special feature of the bonus certificate is its high sensitivity to share prices that are approaching the barrier of EUR 35, which is still intact – this applies in particular shortly before the end of the term. If the share price is around EUR 35.05 on the valuation day itself, 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 Put Down and Out is now at its maximum – just before the still intact barrier.