Certificates are financial instruments characterized by a wide variety of risk-return profiles, and able to provide to the investors a suitable financial solutions related to every different investment strategy .
Investment Certificates are securitized derivatives, which means a combinations of financial contracts embodied in single securities, which can be traded like stocks. These products are issued by financial institutions which assume the obligation to pay the due cash flows, according to what stated in the related prospectus.
A single certificate presents different characteristics, for example:
- directionality of the underlying asset (exposition to positive and negative movements)
- cash flows during the life of the instrument (coupons)
- early redemption with premium for the investor
- full, partial, or conditioned capital protection of the initial amount invested
- redemption premium at maturity
This diversity of profiles can be achieved because the investor renounces, with the purchase of a certificate, to the dividends paid by the underlying asset during the life of the certificate.
The purchasing of a certificate is equivalent to an investment in call or put options.
Options contained in the certificates can belong to the standard category, the so-called “plain vanilla” options, or to the “exotic” one, which includes options characterized by special clauses. It is frequent to find certificates incorporating the so-called “barrier options”, in particular put ones. This kind of options provide the possibility to hedge one’s position against a drop in the underlying’s value as long as it stays above the level identified by the barrier. Certificates presenting this characteristic have a conditional capital protection. An interesting example is represented by Bonus Certificates: these instruments can be decomposed in two components, the first one is the underlying asset and the second one is a barrier option with a strike price set higher than the initial level.
Assuming that a Bonus Certificate is characterized by the choice of Eni stock as underlying asset, with a price of 16€ per stock (100%) at the certificate issuance, Bonus level set at 20.8€ (130%), and barrier set at 12€ (75%). In addition, let’s assume that the barrier hit will be relevant only at maturity (in reality, it is actually more common, for the majority of Bonus Certificates, to take into account the reaching of the barrier level during the entire life of the instrument). The presence of a barrier option in the certificate allows the investor to enjoy a capital protection at maturity in case of a drop in the value of the underlying asset up to the 25%. If the barrier level is not reached, the investor will obtain a redemption at maturity at least equal to 130, which corresponds to a value of 20€ for the underlying asset. On the other hand, if the barrier level is surpassed, the owner of the certificate will be fully exposed to the movements in the price of the underlying asset, let them be either upwards or downwards.