Here, too, you have the opportunity to invest indirectly in an underlying instrument and pay less than you’d have to for buying it outright. Hence the word “discount”: the price of the certificate will always be lower than that of the underlying stock or index. Discount certificates bestow the right to receive a specific stock or share index (physically or the countervalue thereof). At the same time, as owner of a barrier discount certificate, you also enjoy a limited degree of capital protection if the underlying instrument trades into negative territory. As a result, your risk of incurring a loss on such an investment is less than would be the case if you were to make a direct investment in the underlying instrument.
Similar to barrier reverse convertibles, a barrier discount certificate is equipped with a knock-in. If that threshold remains untouched during the certificate’s term to maturity, at expiration you’ll receive payment of a predetermined amount (cap), regardless of where the price of the underlying instrument might lie at that point. Due to the cap, however, your profit potential is always limited. At maturity, the maximum amount will only be paid out if the barrier has never been touched or undercut during the entire term. But if the knock-in is so much as kissed, the barrier discount certificate immediately converts into a normal discount certificate.
If at some point the barrier is violated and the underlying instrument ultimately closes below the exercise price, at maturity your account will be credited with either the appropriate number of underlying shares or the cash countervalue of the underlying index as it stood at the close of trading on the expiration date. And of course it’s entirely possible that the stock or index has a lower value at that point than the capital you originally invested.
Barrier discount certificates are suited for investors who are expecting the underlying instrument to trade sideways or slightly higher during the term to maturity. So you should only buy this product if you’re convinced that the underlying stock or index will never touch the barrier level.