The two most important yield enhancement products are reverse convertibles (term used at Julius Baer: ICE Units for Income Cash or Equity) and discount certificates (term used at Julius Baer: ToY Units for Title or Yield and CoY Units for Currency or Yield).
How yield enhancement products work
While reverse convertibles come with a guaranteed coupon, discount certificates are always priced lower than the underlying security. The returns on reverse convertibles and discount certificates are equally high if both products have the same underlying security and the identical strike price and expiry.
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Reverse convertible / discount certificate
The diagram shows the payout profile, which is identical for reverse convertibles and discount certificates. |
Yield enhancement products are the ideal investment solution if you
- pursue a yield-oriented investment strategy and would like to lower the risk compared with a direct investment in the underlying;
- are looking for an attractive alternative to direct investments;
- expect the underlying security to trade sideways to slightly higher.
Due to the limited profit potential, there is a danger that the investor will not be able to fully participate in sharply rising markets.
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Bond and sale of a put option
The coupon is financed with the premium from the sale of the option and the interest on the money market investment.
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Underlying security and sale of a call option
You receive the dividends due and the premium earned upon sale of the option via the discount in price. |
| Repayment at expiry |
The repayment is determined by the price of the underlying security. You receive the coupon in all cases.
If at expiry the price of the underlying security is above the strike price, you receive repayment of the capital. If the underlying closes below the strike price, you receive – depending on the conditions of the product in question – either delivery of the underlying security or a cash settlement. |
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The repayment is determined by the price of the underlying security. If at expiry the underlying is trading at or above the strike price, you receive repayment of the discount certificate at the strike price.
If at expiry the underlying is trading below the strike price, you receive – depending on the conditions of the product in question – either delivery of the underlying security or a cash
settlement.
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Barrier reverse convertibles
Barrier reverse convertibles behave in a similar fashion to reverse convertibles except that the put option comes with a knock-in barrier. If the price reaches or falls below the barrier, the product converts into a normal reverse convertible.
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Multi Barrier Reverse Convertible
One variant of a barrier reverse convertible is the multi-barrier reverse convertible (term used at Julius Baer:
Double, Triple, Quadruple und Quintuple ICE Units). This product is based on a number of underlying securities that have knock-in barriers (individually or all the same). |
If none of the underlyings reaches the knock-in, or if they all close above the strike price, you are repaid the entire nominal amount.
If one of the underlyings reaches the knock-in and if at least one of them closes below the strike price, at expiry you receive – depending on the conditions of the product in question –
either delivery of the security with the worst performance at expiry or a corresponding
cash settlement.
The coupon is paid in all cases.