Discount Certificate
The underlying bought at a discount, in exchange for giving up gains above a cap.
Payoff at maturity
Move the parameters; the product formula and its building blocks are recomputed from the same engine that is tested against the workbook.
- Product
Redemption 100 %
Per 10'000 of nominal
| Underlying at maturity | Level | Redemption | Amount | Gain / loss |
|---|---|---|---|---|
| −30 % | 70 % | 70 % | 7'000 | −3'000 |
| unchanged | 100 % | 100 % | 10'000 | +0 |
| +30 % | 130 % | 110 % | 11'000 | +1'000 |
Coupons are shown as paid at maturity together with the nominal. Costs, taxes and the price you paid are not included.
Data table and formulas
Discount Certificate (1200): redemption at maturity for an underlying at 0 % → 0 %; 100 % → 100 %; 110 % → 110 %; 200 % → 110 % of its initial level.
| Series | Formula | 0 % | 25 % | 50 % | 75 % | 100 % | 125 % | 150 % | 175 % | 200 % |
|---|---|---|---|---|---|---|---|---|---|---|
| Long Underlying | S | 0 | 25 | 50 | 75 | 100 | 125 | 150 | 175 | 200 |
| Short Call - OTM | −(1 × max(S − cap, 0)) | 0 | 0 | 0 | 0 | 0 | -15 | -40 | -65 | -90 |
| Product | min(S, cap) | 0 | 25 | 50 | 75 | 100 | 110 | 110 | 110 | 110 |
Largest difference between the sum of the blocks and the product formula over the grid: 0.0e+0.
How it is built
Each block drawn on its own, then added. The last chart is the sum, and it is identical to the product line above.
- Long UnderlyingS
- Short Call - OTM−(1 × max(S − cap, 0))
- Productmin(S, cap)
Largest gap between the sum of the blocks and the product formula on this grid: 0.0e+0. The same identity is tested for every product and scenario in the site's test suite.
Construction, as listed in the workbook
- Long Underlying (Zero-Strike Call)
- Short Call - OTM (strike = Cap)
- Equivalent via put-call parity: Zero Bond (face = Cap) + Short Put (strike = Cap)
In plain English
You hold the underlying (through a zero-strike call) and sell a call at the cap. The premium from the sold call is your discount: you pay less than the current price of the underlying. At maturity you receive the underlying, or its cash value, up to the cap.
The chart shows the redemption at maturity in percent of the initial level. The yield of the product is not on the chart: it comes from the gap between your discounted purchase price and the redemption. The further the underlying ends below your purchase price, the more you lose, one for one.
Chances and risks
Chances
- A positive return even if the underlying is flat or slightly down.
- Simple, no barrier.
- Attractive when implied volatility is high.
Risks
- No capital protection: losses track the underlying below the purchase price.
- Gains above the cap are given up.
- Issuer credit risk.
Who it fits
- Investors with a sideways to slightly positive view who want a buffer and accept a cap.
Who it does not fit
- Investors who expect a strong rally or a sharp fall.
Features that can be added
Cross-category features from the workbook that issuers attach to this type.
Nearby on the map
- 1210Yield Enhancement ProductsDiscount Certificate with Barrier
A discount certificate that repays the cap in full as long as the barrier is never touched.Barrier - 1220Yield Enhancement ProductsReverse Convertible
A fixed coupon in every case; the nominal is repaid only if the underlying ends at or above the strike. - 1230Yield Enhancement ProductsBarrier 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.Barrier - 1255Yield Enhancement ProductsReverse 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. - 1260Yield Enhancement ProductsBarrier Reverse Convertible with Conditional Coupon
The barrier reverse convertible with conditional coupons and, usually, an autocall.Barrier