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Yield Enhancement

Swiss underlyings: Correlations and volatilities

Tuesday, 13 July 2021 Reading time : 3 minutes

Low market volatility
Market volatility continues to hover at low levels, with the Chicago Stock Exchange's Volatility Index rarely scraping the 20 points level since mid-May. When volatility is low, it can be more difficult to find yield-optimizing products with attractive return profiles that also don't carry barriers that are too offensive. One way to combine low-volatility stocks in return-optimization products in a way that results in attractive profiles is to consider the correlations of the selected stocks.

Correlation of stocks
The lower the correlation between the individual stocks - ceteris paribus - the higher the coupons or the lower the barrier. A correlation coefficient of 1 says that stocks move perfectly together.

ABB and Roche, for example, have a correlation coefficient of 0.39, so in simple terms they are only relatively weakly correlated. If, for example, Swiss Life and Swiss Re were compared, a coefficient of 0.83 would be obtained, i.e. a comparatively strong positive correlation.

The product
If a combination such as Nestlé, Novartis and Roche is supplemented by two equities that are as weakly correlated as possible and at the same time have a low implied volatility, an attractive return profile is created with an unchanged barrier.

Callable Barrier Reverse Convertible on ABB, Nestlé, Novartis, Roche and UBS (CHF)

  • 12%* Coupon p.a.
  • 70%* Barrier
  • 12 months Maturity
  • Subscription period 22.07.2021
  • Termsheet

or

  • 7.5%* Coupon p.a.
  • 60%* Barrier
  • 12 months Term
  • Subscription period 22.07.2021
  • Termsheet

ZKB Equity Research rates the shares of Nestlé, Novartis and Roche as "overweight", those of ABB and UBS as "marketweight".

The combination of stocks whose (implied) volatility is higher than that of the market represents another way to increase coupons. If the underlyings also have low correlations, the product can be made even more attractive.


Callable Barrier Reverse Convertible on ams, Logitech, SoftwareONE, Kudelski and Temenos (CHF)

  • 17%* Coupon p.a.
  • 65%* Barrier
  • 12 months Term
  • Subscription period until 20.07.2021
  • Termsheet

*indicative

 

Disclaimer
This communication is for marketing purposes. It is neither an offer nor an invitation to submit an offer, to purchase or to subscribe to securities and does not constitute investment advice. You should consult your advisors before making an investment decision.
Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, financial condition, development or performance of the issuer to be materially different from any future results, financial condition, development or performance expressed or implied by such statements.
The present document has not been drawn up by the research department as defined in the rules of the “Directives on the Independence of Financial Research” published by the Swiss Bankers Association, hence these rules do not apply to this document.
If securities are mentioned in the communication, the base prospectus, the final terms and any key information document may be obtained free of charge from Zürcher Kantonalbank, Bahnhofstrasse 9, 8001 Zurich, VRIS, and from www.zkb.ch/finanzinformationen. 

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