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Euro am Sonntag special: Discount certificates: How investors benefit from the yo-yo on the markets | message


by Emmeran Eder, Euro on Sunday

The DAX has been going up and down since the corona pandemic broke out. Even in the financial crisis, rashes weren’t that extreme. In the meantime, the situation has calmed down slightly, but the VDAX, which measures the volatility of the index, is still above average at almost 50 percentage points.

As a result, many do not currently dare to enter the stock market. The high volatility has advantages for certain products, such as discount certificates, but it does make them more attractive. With these papers, investors acquire shares or indices at a discount on the market price. The discount acts like a risk buffer. Only when it is used up do holders of the certificates suffer losses.

The discount arises because that an option is taxed on the underlying on the futures market and a premium is earned for this. This enables the discount to be shown. The greater the volatility of the underlying, the higher the premium and thus the discount. “Uncertainty is sold with discount certificates. The higher the expectations for future strong price fluctuations, the more attractive the conditions are for these products”, explains Matthias Hppe, certificate expert at HSBC Germany, how it works.

There is nothing for free

Shareholders and holders of index papers fear violent fluctuations, but buyers of discount certificates benefit from it. The buffer reduces the risk of loss for them. However, as the English saying goes: “There is no free lunch” – there is nothing free: profits are limited by a cap, the cap. If this is exceeded, no further price returns can be achieved – in contrast to the direct investment in shares or indices.

Therefore, discount certificates are particularly suitable For investors who expect moderate downward movements, sideways markets or a limited bull market. The higher the discount, the lower the maximum achievable return and vice versa.

The Socit Gnrale discount paper on the DAX (see table below) offers a discount of 16.5 percent on the certificate price of EUR 86.37 at an index of 10,343 points. Investors therefore purchase the DAX for 8,637 index points because the subscription ratio is 1: 100. Only when the DAX falls more than 16.5 percent do the owners of the discounter make a loss.

Disadvantage: The maximum return that can be achieved until the product expires at the end of March 2021 is limited to ten percent. This is because the cap, the cap, is at 9,500 index points. If the DAX is higher than 9,500 points at the end of the term, the earnings will still be cut at 9,500 points.

Suitable for cautious investors

Conversely, this also means that if the DAX sank a further eight percent on the cap, the owner of the discount paper would still receive the maximum possible return. If the DAX crashes again and falls below 8,000 points or even significantly lower, the owners of the discount also suffer high losses – but they are always lower than with a direct investment.

“Due to the better risk-return profile, discount papers with a high discount can also be trusted by investors in the market who would otherwise be too hot in the current phase,” says Benjamin Feingold, founder of the derivative information platform Feingold Research.

For example investors who are concerned that Euro crisis boils up again, and therefore only want to get involved with risk buffers in the Euro Stoxx 50. A Goldman Sachs discount certificate, which runs until the end of February 2021, is suitable for this.

The upper limit is 2,600 index points, 7.5 percent below the current index level of the European leading barometer. If the maturity does not fall below 2,600 meters, investors receive the maximum return of 10.1 percent or 12 percent annually.

As compensation for the profit limitation there is a discount of 16 percent. This means that buyers of the certificate buy the Euro Stoxx 50 for 2,363 counters instead of the current 2,811 index points. Only when the index falls below 2,363 points do they get into the red numbers.
Investors can receive significantly higher discounts than for indices in the case of volatile individual stocks. This includes Infineon. The company is an early cyclical and therefore severely affected by the corona crisis.

Excellent prospects

The US analyst Bernstein Research sees the prospects for the German chip company as short-term in the short term, but the prospects are excellent in the medium term. The approved billion-dollar takeover of the US company Cypress Semiconductor makes strategic sense and will pay off in the long run. In addition, the company is well positioned in a sector comparison. However, the recent extreme fluctuations in the DAX value require good nerves.

So it makes perfect sense to get involved with the Munich group with a discount paper from UBS that offers 32 percent buffer. At 24 percent, the cap at 12.00 euros is significantly below the current exchange rate. If it is not undercut by the due date in January 2021, investors will receive a maximum return of twelve percent.


Image sources: StockThings /, AshDesign /, Finanz Verlag

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