Participation Certificate with Additional Credit Risk
A tracker funded by a synthetic reference bond: full equity exposure plus credit risk, in exchange for better terms.
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.
- No credit event
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 % | 130 % | 13'000 | +3'000 |
Coupons are shown as paid at maturity together with the nominal. Costs, taxes and the price you paid are not included. Scenario: No credit event.
Data table and formulas
Participation Certificate with Additional Credit Risk (1430), scenario "No credit event": redemption at maturity for an underlying at 0 % → 0 %; 1 % → 1 %; 40 % → 40 %; 100 % → 100 %; 200 % → 200 % of its initial level.
| Series | Formula | 0 % | 25 % | 50 % | 75 % | 100 % | 125 % | 150 % | 175 % | 200 % |
|---|---|---|---|---|---|---|---|---|---|---|
| Zero Bond | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 |
| Short Credit Default Swap - Reference Entity | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Long Call - ATM x Participation | participation × max(S − strike, 0) | 0 | 0 | 0 | 0 | 0 | 25 | 50 | 75 | 100 |
| Short Put - ATM x Participation | −(participation × max(strike − S, 0)) | -100 | -75 | -50 | -25 | 0 | 0 | 0 | 0 | 0 |
| Product | 100 + participation × (S − strike) | 0 | 25 | 50 | 75 | 100 | 125 | 150 | 175 | 200 |
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.
- Zero Bond100
- Short Credit Default Swap - Reference Entity0
- Long Call - ATM x Participationparticipation × max(S − strike, 0)
- Short Put - ATM x Participation−(participation × max(strike − S, 0))
- Product: no credit event100 + participation × (S − strike)
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
- Zero Bond (face = nominal)
- Short Credit Default Swap - Reference Entity (Zero Bond + Short CDS = synthetic Reference Bond)
- Long Call - ATM x Participation
- Short Put - ATM x Participation
- Long Call + Short Put at the same strike = synthetic long underlying (forward), funded by the bond
In plain English
The synthetic reference bond (zero bond plus short CDS) funds a long call and a short put at the same strike. Together those two options are a forward on the underlying, so the product moves one for one with it, like a tracker.
The CDS premium improves the terms compared with a plain tracker. The workbook keeps the participation at or below 100 % so the unfloored payoff cannot turn negative, and assumes the product terminates at the recovery value after a credit event.
Chances and risks
Chances
- Participation plus a credit premium.
- Better terms than a plain tracker.
Risks
- Full downside of the underlying.
- Credit event replaces everything with the recovery value.
- Issuer credit risk.
Who it fits
- Investors who want equity participation and are paid to carry a named credit risk.
Who it does not fit
- Investors who want a simple tracker.
Features that can be added
Cross-category features from the workbook that issuers attach to this type.
Nearby on the map
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