Product Know-how

Reverse convertibles and barrier reverse convertibles

Reverse convertibles are among the most popular risk-optimization products in Switzerland and are suited above all for investors who are anticipating a sideways or slightly upward trending market.

The economic nuts and bolts of reverse convertibles correspond precisely to those of discount certificates, the only difference being that with a reverse convertible you earn income during its entire term in the form of coupon payments. While those returns are considerably higher than the yields to be had in the bond market, reverse convertibles carry a higher risk than bonds because repayment of the principle amount is not guaranteed. Here’s an overview of the most important differentiating factors:

   Discount certificates           Reverse convertibles
 Nature  Similar to a stock  Similar to a bond
 Coupon payments  None  Regular coupon payments
 Income tax (Swiss investors)       None  Interest portion of the coupon payments
 Pricing  Per unit  In percent
 Worst-case loss  Invested capital  Invested capital less coupon payments

Example of a reverse convertible

Remaining term to maturity : 1 year
Underlying : Nestlé
Coupon: 10 percent
Current price of certificate: CHF 40.00
Current price of stock: CHF 40.00

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