Thursday, 28 April 2022 Reading time : 2 minutes
Yield enhancement products such as barrier reverse convertibles are, as the name suggests, often used to generate attractive returns in sideways markets with low momentum. The recipe is usually quite simple: the higher the barrier, the greater the probability of a barrier event occurring - accompanied by higher coupons. In the case of underlyings with comparatively high implied volatility, this situation accelerates, which is why low barriers are often chosen in these cases (usually below 60%).
But there is also a more defensive way. Leading indices such as the SMI®, the Euro Stoxx 50® or the S&P 500® have comparatively low volatilities as aggregates of their weighted underlyings, which means that the probability of a knock-in is lower than for individual stocks. However, this probability can be further reduced by means of two parameters:
European barrier monitoring.
In most cases, the barrier of BRCs is observed during the entire lifetime. If the underlying touches the defined barrier during the life cycle of the product, the BRC becomes a reverse convertible, usually with a strike at 100%. The last-look method is different: here, the price of the underlying is not compared with the barrier until the end of the term; this makes a barrier hit less likely, especially if the price performance of the leading indices over the last few years is taken into account.
Particularly defensive barriers
Most often, BRCs are structured with barriers at a minimum of 50%. But lower barriers are possible - this lowers the return, but also the risk of the investment. Especially for investors with a cautious market attitude, such low barrier index BRCs can be an interesting alternative to money market investments or cash holdings.
All of the following products are available for subscription until 4:00 p.m. on May 5, 2022.
European barrier at 40% (Last Look), 3 Years maturity
BRC on SMI® (CHF)
BRC on Euro Stoxx 50® Index (EUR)
American barrier at 40%, 3 Years maturity
BRC on SMI® (CHF)
BRC on Euro Stoxx 50® Index (EUR)
American Barrier, 2 Years maturity
BRC on SMI® (CHF)
BRC on Euro Stoxx 50® Index (EUR)
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