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Recovery strategies – Structured products may be used to reduce losses
Given the uncertainty in the current market environment, here we present one of a number of possible recovery strategies which we can offer.
How does it work?
A client has invested CHF 100’000 into a Barrier Reverse Convertible on Alphabet, Amazon and Meta Platforms. This product pays a guaranteed coupon over the lifetime of the product and a conditional downside protection indicated by the barrier. If the barrier has not been touched, the investor receives back the notional amount at maturity. In our example, Amazon breached the American barrier and the investor risks physical delivery of the worst performing underlying should the stocks not reach the strike levels at maturity. The current bid for this product is at around 80% meaning that the investor could receive approximately CHF 80’000 by selling this product immediately in the secondary market. Subsequently, the client can invest the CHF 80’000 into a recovery strategy aimed at recovery of, at least, the notional amount of CHF 100’000.
Barrier Discount Certificate – A classic recovery strategy
A Barrier Discount Certificate is issued at a price that is below par. The difference between the nominal and the issue price is the profit that the investor can gain with this product. The underlying corresponds to the stock that breached the barrier. For the recovery strategy to work, the parameters should be chosen in a way that the issue price is equal to the current bid of the troubled product. In this case an issue price at around 80% should be targeted, so that the client can invest the amount received from selling the old product. The strike should be chosen to match the level of the previous strike to keep the risk similar as with the old product. This way the loss will be the same as with the original strategy if the barrier is breached at maturity. By opting for the European barrier, a product may be designed which matches the expected performance of the underlying (e.g., EU barrier at, below, or even above, par). As a rule of thumb: the longer the maturity the lower the EU barrier can be. However, a European barrier much above par may not be ideal, because it requires a positive performance of the underlying. For tailored advice, please get in contact with your respective Vontobel salesperson.
The table below shows the payoff in different market scenarios (EU barrier at 100%).
Interested in learning more about other recovery strategies?
It is also possible to use other structured products to implement a recovery strategy – find out more by clicking the link below.