Influence of Volatility on Selected Structured Products

As we know, pricing of most structured products are usually reliant on volatility levels since they are are made up of a different type of options. This article generically shows how volatility affects the different popular structures available.


1.Capital guaranteed products with Participation

Capital guaranteed products consist of a zero-coupon bond and long call options. This means that the client is buying volatility.

Generally speaking, the participation rate will be lower when the volatility is high because fewer calls can be bought for the same amount.

Example: Eurostoxx50®, 3-year term, interest rate of 4%, capital protection 100%:

Volatility 15% 20% 25%
Participation 108% 83% 68%

2.Reverse convertibles (one of Neba’s most-commonly used) 

These instruments consist of a bond part and a short put option on an underlying asset, such as a stock, an index, a currency pair, or a commodity. The investor is selling volatility, so it works opposite of capital guaranteed products.

When to invest?
– Ideally in times of high implied volatility, because a high coupon can be generated.

-Used to optimise returns and can be used for potentially sideways trading markets.

Example: Siemens, 1-year term, strike 100%, interest rate of 2%, dividend yield 0.75%, no knock-in:

Volatility 20% 25% 30%
Coupon 9.5% 11.5% 13.3%

3.Bonus Certificates

As bonus certificates are structured through the purchase of a down-and-out put option, the situation is less clear and depends on circumstances. A down-and-out put option “lives” as long as the barrier is not touched and “dies” as soon as it is reached.

High volatility is usually advantageous when investing in bonus certificates.

The fact is that when volatility is high the barrier is more likely to be triggered, which means that the option is then more likely to become worthless.

The following example shows how the barrier of a bonus certificate changes with changing volatility.

Example: Eurostoxx50®, 3-year term, interest rate of 4%, strike 100%, participation 100%, no bonus:

Volatility 15% 20% 25%
Barrier (in % of spot) 68% 64% 60%

(Credits to and credit suisse for materials used)

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