Relevant variables

Investment certificates are characterized by the presence of combinations of different options in each instrument. If the strategy of the investor is a “buy and hold” one, that is, he plans to buy the product to maintain it in his portfolio until maturity, the most relevant variable is represented by the underlying asset’s price’s upward and downward movements. The path followed by the underlying asset’s price from issue to maturity is critical for products characterized by barriers and early redemption. For example, if an investor has purchased a Bonus Certificate, the return at maturity depends on the path followed by the underlying’s asset’s price: if it has never been lower than the barrier level, the investor will have the right to obtain the bonus, if else, he will not.

If an investor’s planned holding period is shorter than the certificate’s maturity, it is important to evaluate the sensitivity of the instrument to variations in some relevant variables:

  • Underlying asset’s volatility
  • The passing of time
  • Interest rates dynamics
  • Expected dividends during the life of the certificate
  • Variations in the value of the currencies the underlying asset’s price is denominated in
  • Correlation between the different assets the underlying is made of

Underlyng asset's volatility

Volatility is a statistical index that measures the variability of the underlying asset’s returns with respect to the average return. This variable is one of the most used indicators in measuring the risk of an investment. Volatility can be measured ex post, by computing the standard deviation of historical daily returns, or ex ante, by computing the expected volatility as implied in the prices of options traded on regulated markets. Investors holding stocks in their portfolios should fear increases in volatility as they will cause their position to be riskier; on the other hand, investors holding plain vanilla options benefit from increases in volatility.

For an investor holding certificates without barriers and caps (return limits), a rise in the market volatility will cause an increase in his portfolio’s value, because by purchasing such certificates the investor has purchased volatility. However, the situation is different if the certificates have barriers: a surge in volatility makes it more likely to exceed the barrier level and thus lose the capital protection, in case the barrier is set lower than the initial strike price. Generally speaking, growing volatility causes products like Bonus, Airbag, Express, Cash Collect and Twin Win certificates to lose value. The farther the barrier level and the smaller the time-to-maturity, the less the certificate is sensitive to volatility. Vice versa, a reduction in volatility causes these products’ value to grow.

Passing of time

Certificates usually have a fixed maturity, except for the so-called “open end” Benchmark certificates. The passing of time, ceteris paribus, causes the probability of significant price variations to be lower. Approaching maturity, the value of the instrument can rise or fall depending on the type of instrument and the level of the underlying. Usually, the passing of time reduces options prices, thus it is common for certificates to suffer a depreciation due to the approach of their maturities, especially if the direction of the underlying is opposite to the expectations at the time of purchase. The presence of barriers or caps allows to be favorably exposed to the passing of time.

Interest rates dynamics

Variations in interest rates affect certificates’ prices with a smaller impact then variations in volatility and in non-intuitive ways. A rise of interest rates, ceteris paribus, tends to cause call options (bullish on the market) to gain value, and put options (bearish on the market) to lose value. In the case the certificate is “quantum” type (that is, it offers a protection against fluctuations in the currency value), the dynamics of interest rates in both the Eurozone and the area of the currency the underlying is denominated in are relevant for the certificate value.

Expected dividends

Cash flow from dividends is an important source of revenue for investors in equities. An indirect exposition in this kind of assets though derivatives does not give the investor any right on such cash flows, which in addition cause the price of the underlying to decrease when the dividends are paid. Certificates are structured so that the waiver of dividends serves as financing tool for the implementation of the underlying strategies of the instruments.


The underlying assets of certain certificates can be composed of a plurality of securities and/or indices, as well as single assets. The relationship between the behaviors of the various elements of the underlying (correlation) is then an important variable to consider. If these elements share a homogeneous behavior, the correlation index will be close to 1, on the other hand, if their behaviors are inhomogeneous, correlation will be close to 0. Correlation is not stable during the life of the certificate, and will evolve with market volatility. A rise in correlation can be responsible of an increase in the value of “worst-of” multi-asset certificates, which are indexed to the performance of the worst security of a chosen basket. Vice versa, when correlation decreases, also the value of these certificates does. As for certificates indexed to the average performance of the securities belonging to the chosen basket, since the position benefits from diversification, a surge in correlation will cause a drop in the value of the derivative.