Yield Enhancement Products
Sell the upside, collect a coupon or a discount.
Introduction
Yield enhancement means selling an option. In a discount certificate you sell a call and receive the premium as a lower purchase price. In a reverse convertible you sell a put and receive the premium as a coupon. Either way the gain is capped and the downside is yours below a certain level.
The shape of the payoff is the mirror image of capital protection: a slope on the left, a ceiling on the right. The ceiling is reached in a flat market, which is where these products beat a direct investment. In a strongly rising market they lag; in a falling market they lose like the underlying, minus the premium you collected.
Barriers soften the slope: a down-and-in put only comes alive if the underlying touches the barrier at some point during the term. Until then, the product repays the full amount even if the underlying has fallen. After a touch, the buffer is gone and the slope is back. Conditional coupons and autocalls add path dependence on top, and the most popular Swiss structure, the barrier reverse convertible with conditional coupon, combines all of it.
The products
In workbook order. Each page has an interactive payoff chart and a construction visualiser.
- 1200Sideways, Slightly risingDiscount Certificate
The underlying bought at a discount, in exchange for giving up gains above a cap.No capital protection - 1210Sideways, Slightly risingDiscount Certificate with Barrier
A discount certificate that repays the cap in full as long as the barrier is never touched.Conditional protection Barrier - 1220Sideways, Slightly risingReverse Convertible
A fixed coupon in every case; the nominal is repaid only if the underlying ends at or above the strike.No capital protection - 1230Sideways, Slightly risingBarrier Reverse Convertible
A reverse convertible with a safety barrier: the nominal is repaid unless the barrier was touched and the underlying ends below the strike.Conditional protection Barrier - 1255Slightly rising, RisingReverse Convertible with Conditional Coupon
A reverse convertible whose coupon is paid only when the underlying is above a trigger on the observation date; usually with early redemption.No capital protection - 1260Slightly rising, RisingBarrier Reverse Convertible with Conditional Coupon
The barrier reverse convertible with conditional coupons and, usually, an autocall.Conditional protection Barrier