Product Know-how

Outperformance Bonus Certificates

The newly introduced “outperformance bonus certificate” combines the strengths of both outperformance and normal bonus certificates. This means that you’re protected on the downside by a bonus level (i.e. a feature of bonus certificates) but nevertheless have the opportunity to participate disproportionately in upside gains in the underlying instrument (the “outperformance certificate” dimension). If you compare all three structured product types with each other, you’ll see that outperformance bonus certificates come up a bit short in terms of the characteristics of the other two forms. In other words, the disproportionate participation rate (outperformance) is usually somewhat lower than with a “plain vanilla” outperformance certificate. This is because additional bonus protection has to be bought in order to structure the product properly. The same applies to the bonus dimension: because such a certificate still affords disproportionate participation, its downside protection level is more modest.

Here, the investor expects the price of the underlying instruments to rise, but nonetheless wants to have a certain degree of capital protection (knock-in) if the price were to decline.

Example of an outperformance bonus certificate

Remaining term to maturity: 2 years
Underlying : Baloise
Strike price: CHF 80.00
Participation factor: 150 percent
Bonus level: CHF 80.00
Safety threshold: CHF 68.00
Current price of certificate: CHF 80.00
Current price of stock: CHF 80.00

If the price of Baloise is higher than the strike price upon expiration, you’ll earn 150 percent of what the stock actually gained. So if Baloise were to rise by 10 percent, you’d take home a return of 15 percent. But if the stock is lower than the strike price on expiration date, what you receive in return will depend on whether the safety threshold has been hit. If not, the repayment will be in the amount of the bonus level (i.e. CHF 80). But if the threshold has been violated, the underlying security will be delivered into your account, meaning that you’ll have incurred (on paper at least) a 1:1 loss in step with the price decline of Baloise.

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