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|
|Remaining term to maturity :||1 year|
|Current price of certificate:||CHF 40.00|
|Current price of stock:||CHF 40.00|
Reverse convertibles are offered in the marketplace also in modified varieties that are more precisely tailored to investors’ specific needs. The most widely used variation is the barrier reverse convertible, which offers you additional protection down to what is called a knock-in barrier. If that barrier is touched or penetrated during the term to maturity, the protection otherwise afforded by this product lapses and the payment profile reverts to that of a classical reverse convertible.
|Remainung term to maturity :||1 year|
|Underlying :||Credit Suisse|
|Current price of certificate:||CHF 30.00|
|Current price of stock:||CHF 30.00|