How do reverse bonus certificates work?
When constructing a reverse bonus certificate, the issuer combines a long position in a put with a strike price of 100 (this theoretically existing put represents the short position in a share) and a long position in a special form of a call option. In contrast to the classic call, this call up and out is equipped with a barrier. If this is violated, this exotic call immediately expires worthless. Due to this restriction, the call up and out is significantly cheaper than the classic call option with an identical base price.
The base price of the Call Up and Out corresponds to the bonus level of the certificate, its barrier defines the barrier of the reverse bonus certificate. Since the discounted dividends of a share or an index – unlike the bonus certificate – increase the price of a reverse bonus certificate, a reverse bonus certificate can only be issued without a significant premium if the interest rates are very high.
If the share then trades below the bonus level on the valuation date, the call up and out has no intrinsic value, so that only the difference between the reverse level and the price of the underlying is decisive for the repayment amount of the reverse bonus certificate. This is represented by the value of the put with a base price of 100 (very positive scenario).
If, on the other hand, the base value trades above the base price (positive scenario), around EUR 52, the call up and out has an intrinsic value of EUR 12. This results from the difference between the actual share closing price and the base price (= 52 euros – 40 euros) and of course only exists as long as the barrier is intact.
If the barrier of the call up and out is violated during the observation period, this call immediately expires worthless. The repayment amount now depends solely on the Put Strike 100, the intrinsic value of which on the valuation day always corresponds exactly to the difference between the reverse level minus the closing price of the share. Even if the barrier is broken, a positive return is still possible, but investors must assess individually to what extent a price slump still appears likely after the high barrier has been breached in the remaining term. For a neutral scenario, the base value must actually fall to the level of the purchase price of the certificate, for a positive scenario it must even close below.
Important: A special feature of the Reverse Bonus Certificate is its high sensitivity to share prices that are approaching the still intact barrier of 65 euros – this applies particularly shortly before the end of the term. If the share price is around EUR 64.95 on the valuation day, a small price movement will decide whether investors will get around EUR 35 back or the bonus amount of EUR 60. The closer the stock price gets to the barrier, the more likely it will be breached. At the same time, the value of the call up and out is just now – just before the still intact barrier – maximum.