{"date":"2023-04-25T00:00","headerImageUrl":"https://structuredproducts-ch-pub-uat.leonteq.com/product-news/product-homepage-banner/leonteq-know-how-product+homepage+banner.jpg","subTitle":"Yield enhancement products: Managing terms professionally","windowTitle":"Leonteq Know-How","category":"know-how","title":"Leonteq Know-How 3","body":"<p>Unlike almost any other financial instrument, structured products allow you to position yourself on the capital market in perfect harmony with your risk profile and market expectations. To ensure this flexibility, a highly qualified team at Leonteq works every day on products with the best possible risk/reward profile.<\/p>\n<p>It is important to know that structured products are basically made up of various components. At the forefront are options of various types, which make a significant contribution to determining the price of a structured product. But there are further relevant factors, such as the money market interest rate, the currency and term, the barrier or strike price, and the implied volatility of the underlying. In the third issue of our knowledge newsletter, we present the factors influencing pricing in the primary market, using yield enhancement products as an example.<\/p>\n<p><iframe src=\"https://www.linkedin.com/embed/feed/update/urn:li:ugcPost:7056556017437798400?compact=1\" allowfullscreen=\"\" title=\"Embedded post\" width=\"100%\" style=\"aspect-ratio: 16/9\" frameborder=\"0\"><\/iframe><\/p>\n<h3>Fluctuations bring returns<\/h3>\n<p>Let's put the cart before the horse: Implied volatility, i.e. the expected range of fluctuation of an underlying asset, plays a key role in pricing. This derived variable has a direct impact on the option price. Low implied volatility values mean that a relatively stable development of the underlying is forecast, high values, on the other hand, indicate high expected fluctuations, from which in turn greater uncertainty can be derived. Attention: Volatility says nothing about the price direction, but only describes the extent of the changes.<\/p>\n<p>What does this mean for the product conditions? In yield enhancement products, the options usually form the yield element. For example, in a BRC, a put option on the underlying asset is sold. The income from the option premium increases the higher the volatility of the underlying, thereby improving the conditions of the product. However, it is also important to know that the higher the volatility, the riskier the investment. This is because it increases the probability that the underlying will touch or break through a predefined barrier. As a rule of thumb, the higher the interest rate, the lower the security level - and vice versa.<\/p>\n<h3>The premium is what counts<\/h3>\n<p>Another factor plays a key role in options: the strike price. Depending on the level at which the strike price is selected, the option is either \"at the money (ATM)\" or \"out of the money (OTM)\". If the strike price is at the current price of the underlying, i.e. \"at the money\", it is a neutral strategy. Consequently, a reverse convertible would achieve the maximum return if prices remain unchanged. The product can be designed much more defensively - and at the same time with lower returns - if the strike price is chosen below the price of the underlying. The lower opportunity goes hand in hand with the OTM option, which offers a lower premium, which in turn influences the level of the coupon. However, the risk also decreases at the same time, because the underlying must first fall to the strike price in order to enter the loss zone. Basically, it can be said: By choosing the strike price, the issuer directly influences the pricing of the product. Investors, in turn, can use the selected strike price to influence whether they wish to enter into an opportunity-oriented (ATM) or conservative (OTM) investment.<\/p>\n<h3>Other parameters<\/h3>\n<p>As already mentioned, the money market interest rate and the term are also important parameters in structuring. If, for example, the money market interest rate increases, better conditions can be shown. In the case of a BRC, for example, the zero bond purchased promises a greater return if interest rates rise, because this increases the price discount of the bond to the nominal. A high reference interest rate for the currency in which the product is denominated and a lavish dividend on the underlying also have a positive effect. The issuer benefits from the interest rates and the planned distributions of the companies, which allows the issuer to present higher coupons, for example. This also applies with regard to correlations, i.e. when several underlyings are used as in multi-structures. A low correlation between the underlyings has a positive effect on the product terms, because this increases the probability of a negative outlier, which can violate the barrier. The maturity, in turn, has a significant influence on the price of the put option sold and thus on the amount of the coupon or the distance of the barrier.<\/p>\n<h3>A question of type<\/h3>\n<p>Speaking of barriers, there are two types of barriers: European and American. Investors who are looking for greater security will find what they are looking for in the EU barrier. With this type, the barrier is only active at the final fixing of the product; during the term, the underlying has free rein. Important: The increased level of security is not free of charge, but is usually at the expense of the yield opportunity. However, those who expect increased volatility in the short term are well advised to use the European barrier. With the U.S. version, on the other hand, the barrier is \"in operation\", so to speak, during the entire term, i.e. the price performance of the underlying is continuously monitored. Although this represents a higher risk compared to monitoring by expiration, it also increases the potential return.<\/p>\n<h3>Important terms<\/h3>\n<div><ltq-table id=\"Important Terms\" title=\"\"> <template v-slot:default=\"\">\n<tbody>\n<tr>\n<td>Strike price<\/td>\n<td>The strike price is the price at which the holder of the option can buy or sell the underlying security.<\/td>\n<\/tr>\n<tr>\n<td>Conversion Ratio<\/td>\n<td>The number of shares of the underlying the investor receives if the predefined criteria for a physical redemption are met. The conversion ratio is calculated as follows: Nominal/Strike Price of the underlying.<\/td>\n<\/tr>\n<tr>\n<td>Coupon<\/td>\n<td>The coupon refers to the interest rate on a security, usually a bond. The amount stated as a percentage refers to the nominal value. In the case of reverse convertibles, the coupon guarantees recurring payments as well as a maximum yield that is easy to forecast.<\/td>\n<\/tr>\n<tr>\n<td>Dividend<\/td>\n<td>Dividends correspond to the part of the profit of a corporation that is distributed to the shareholders. The amount is decided by the General Meeting. The dividend attributable to an individual share is calculated on the basis of the denomination of the share capital in shares.<\/td>\n<\/tr>\n<tr>\n<td>Correlation<\/td>\n<td>Correlation measures the relationship between different underlyings. Correlation is an important factor when designing products with several underlyings. The lower the correlation among the selected underlyings, the better the conditions.<\/td>\n<\/tr>\n<tr>\n<td>Nominal<\/td>\n<td>The nominal value or par value is the fixed and imprinted amount for securities. It is the basis for calculating interest and repayment for a bond.<\/td>\n<\/tr>\n<tr>\n<td>Put option<\/td>\n<td>A put option gives the buyer the right to sell a certain asset within a specified period (American) or at the end of the term of the contract (European) at a specified price. The seller agrees to sell the underlying asset at a pre-agreed price, known as the strike price, if the option is exercised by the buyer. The seller receives a premium for this.<\/td>\n<\/tr>\n<tr>\n<td>Worst-of<\/td>\n<td>Structured products that refer to several underlyings, of which only the underlying with the worst performance (worst-of) is decisive for the redemption.<\/td>\n<\/tr>\n<tr>\n<td>Volatility<\/td>\n<td>Volatility describes the level of price fluctuation of securities and provides information about risk. What can be a disadvantage in equity investment helps in the design of structured products. Higher volatility makes option contracts more expensive and increases the scope for design. For example, with higher volatility, BRCs offer greater return potential through more lavish coupons and/or improved risk protection through a lower barrier.<\/td>\n<\/tr>\n<\/tbody>\n<\/template> <\/ltq-table><\/div>\n<div class=\"ltq-row\" style=\"flex-direction: row;\"> <ltq-button color=\"primary\" url=\"https://structuredproducts-ch.leonteq.com/news/know-how/know-how-reverse-convertibles?language_id=1\" label=\"Leonteq Know-how 2\"><\/ltq-button>\n<ltq-button color=\"primary\" url=\"https://structuredproducts-ch.leonteq.com/news/know-how/know-how-transparent-pricing?language_id=1\" label=\"Leonteq Know-How 4\"><\/ltq-button><\/div>\n<div>      <p>We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: <a href=\"tel:+41588001111\">058 800 11 11<\/a>, email <a href=\"mailto:info@leonteq.com\">info@leonteq.com<\/a> or <a href=\"/contact\" title=\"Contact\">contact us here<\/a>.\n<\/p>\n  <\/div>","url":"know-how-impacting-factors","investmentThemeVerticalImageUrl":"https://structuredproducts-ch-pub-uat.leonteq.com/product-news/sidenav-banner/leonteq-know-how-sidenav+banner.jpg","thumbnailUrl":"https://structuredproducts-ch-pub-uat.leonteq.com/product-news/thumbnail/leonteq-know-how-thumbnail.jpg"}