Since 1989, retail certificates have become core in the field of retail banking (Pilz 2006). Particularly, the stock crash between 2000 and 2003 has fostered the success story of these investment products because many private investors have sustained enormous losses with their stock exposures. Therefore, they have been looking for alternatives to traditional investment forms which are lower in risk but gaining satisfactory returns (Schiereck 2004).
In order to fall in line with this growing specific demand of investors, major German banks have invented the new asset class of retail certificates. These products can offer depositors characteristics for every market scenario as its explicit strength (Löhr and Cremers 2007).
This booming development reached its peak in December 2007, as German private investors hold 135 bn EUR of retail certificates in their deposits (Barthel 2008).
Because of their attractive risk-return profile, Bonus Certificates, which were issued for the first time by the German bank Sal. Oppenheim in 2003, have gained a key position in this sector with a market share of 21.9% (Fischer 2008). The barrage of newly issued products has led to the circumstance that many private investors are facing the problem of lack in transparency concerning the structure of Bonus Certificates.
The present diploma thesis intends to provide the reader an extensive overview on the investment segment of Bonus Certificates. Thereby the author focuses on the conception and pricing of this financial structured product in order to develop an investment guideline for investors, how to deal with this complex derivative. In particular, the author analyses the influence of the input factors, both on each embedded option component and on the Bonus Certificate as a whole. Hence, investors may get a better insight of the disproportionate valuation of Bonus Certificates over maturity.
Due to current negative market situation, the author has also a look into the impact of issuer’s default risk and barrier violation on Bonus Certificates.
Table of Contents
1 Introduction
1.1 Problem Definition
1.2 Procedure
2 Basics
2.1 Definition of Certificates
2.2 Components of Certificates
2.2.1 Fixed Income Securities
2.2.2 Stocks
2.2.3 Standard Derivatives
2.2.3.1 Options
2.2.3.2 Futures
2.2.4 Exotic Options
3 Benefits of Bonus Certificates
3.1 Investors
3.2 Issuers
3.3 The German Bonus Certificates Market
4 Characteristics of Bonus Certificates
4.1 Description of Bonus Certificates
4.1.1 Underlying
4.1.2 Conversion Ratio
4.1.3 Barrier
4.1.4 Bonus Level
4.1.5 Maturity
4.1.6 Default Risk
4.1.7 Costs
4.2 Design of Bonus Certificates
4.2.1 Zero-Strike-Call
4.2.2 Down-and-Out Put
4.2.3 Payoff-Profiles
4.3 Pricing of Bonus Certificates
4.3.1 Black-Scholes-Model
4.3.2 Underlying
4.3.3 Volatility
4.3.4 Dividends
4.3.5 Interest Rate
4.3.6 Maturity
4.3.7 Divergence of Pricing: Fair Value – Secondary Market
4.4 Taxation
4.5 Special Forms of Bonus Certificates
4.5.1 Capped Bonus Certificates
4.5.2 Quanto Bonus Certificates
4.5.3 Reverse Bonus Certificates
4.5.4 Multi Bonus Certificates
5 Empirical Analysis
5.1 Dresdner Bonus-Barrier-Certificate I
5.1.1 Description
5.1.2 Design
5.1.3 Pricing
5.1.4 Taxation
5.2 AGI Bonus Barrier Fund
5.2.1 Description
5.2.2 Design
5.2.3 Pricing
5.2.4 Taxation
5.3 Comparison: Dresdner Bonus-Barrier Certificate – AGI Bonus Barrier
5.4 Impact of current Stock Exchange Collapse on Bonus Certificates
6 Conclusion
Research Objectives and Key Topics
The diploma thesis aims to provide an extensive overview of the Bonus Certificates investment segment. It focuses on the conception, structure, and pricing of these financial products to develop a practical investment guideline. By analyzing embedded option components and relevant input factors, the thesis helps investors better understand the valuation of these complex derivatives, particularly in volatile market situations.
- Fundamental basics and component structure of retail certificates.
- Pricing mechanisms and the application of the Black-Scholes model.
- Strategic importance of barrier options and payoff profiles at maturity.
- Empirical analysis of specific Bonus Certificates and certificate funds.
- Impact of issuer default risk and market volatility on investment outcomes.
Excerpt from the Book
4.2.2 Down-and-Out Put
Down-and-Out Puts (DaOP) are a type of barrier options (Gerhardt 2006). The value of this exotic option depends on following fact: For a Down-and-Out Put, a lower barrier is specified. If the spot price falls below this lower barrier during the life of the option, the option may ceases to exist.
Thus the value of a Down-and-Out Put at maturity is defined as follows (Jarrow and Turnbull 1996):
This may help to understand the valuation of this complex option. Consider the Down-and-Out Put option that matures at date T with strike price K and barrier B. If the barrier B has not been crossed (S(t) ≥ B), then I=1 and the exotic option would nearly have the payoff of a normal put option which will have an intrinsic value at expiry equal to the bonus level minus the final index level. The strike price K is equal to the bonus level of the Bonus Certificate, whereas the barrier B complies with the threshold of the certificate.
If the barrier has been penetrated (S (t) ≤ B), then I=0 and the value of the option is zero, regardless of the level of the underlying asset price. Compared to ordinary put options, Down-and-Out Puts are much cheaper because their value is endangered by a knock-out scenario (Götte 2007). So issuers can provide more attractive bonus and risk buffer features than put options can do. It is difficult to identify the value driver respectively Greeks of a Down-and-Out Put because many factors imply the valuation.
Chapter Summary
1 Introduction: Defines the problem regarding lack of transparency for private investors and outlines the thesis procedure.
2 Basics: Explains fundamental definitions, components like fixed income securities and derivatives, and introduces the concept of certificates.
3 Benefits of Bonus Certificates: Analyzes the advantages for investors through improved risk-return profiles and discusses the issuer's perspective.
4 Characteristics of Bonus Certificates: Details specific features including underlying assets, barriers, conversion ratios, pricing, taxation, and specialized variations like Capped and Quanto certificates.
5 Empirical Analysis: Conducts a practical case study comparing a specific Dresdner certificate and the AGI Bonus Barrier Fund, evaluating performance and tax implications.
6 Conclusion: Summarizes the complexity of the product structure and reinforces the importance of assessing risk-return profiles for successful investment.
Keywords
Bonus Certificates, Retail Certificates, Structured Products, Down-and-Out Put, Barrier Options, Black-Scholes Model, Financial Derivatives, Risk-Return Profile, Underlying Asset, Maturity, Issuer Default Risk, Volatility, Taxation, Capital Protection, Pricing Transparency
Frequently Asked Questions
What is the core subject of this thesis?
The thesis provides an in-depth analysis of Bonus Certificates as a structured financial product, focusing on their components, valuation, and suitability for private investors.
What are the primary themes discussed?
The central themes include the design of Bonus Certificates using exotic options, pricing factors such as volatility and dividends, risk assessment, and the impact of the German tax reform.
What is the primary goal of the research?
The goal is to provide investors with a comprehensive overview and a practical guideline for dealing with Bonus Certificates, specifically highlighting how to evaluate their structure and pricing.
Which scientific methodology is applied?
The work utilizes a combination of theoretical analysis based on standard financial models (like Black-Scholes) and an empirical analysis of specific investment products to illustrate real-world performance.
What is covered in the main part of the thesis?
The main part covers detailed product characteristics, the integrated option components (Zero-Strike-Call and Down-and-Out Put), valuation drivers, taxation, and empirical observations of certificate performance.
Which keywords define this work?
Key terms include Bonus Certificates, barrier options, financial engineering, risk-return optimization, and pricing transparency.
How does the Down-and-Out Put option affect the certificate's value?
The Down-and-Out Put is a crucial exotic component that defines the "bonus" structure; its value is highly sensitive to the proximity of the barrier and market volatility, effectively knocking out the certificate if the barrier is breached.
Why is the "Zero-Strike-Call" significant for Bonus Certificates?
The Zero-Strike-Call tracks the performance of the underlying asset up to the maturity date, serving as one of the two core components that enable the specific payoff profiles associated with Bonus Certificates.
- Quote paper
- Dipl.-Kfm. (FH), BBA Jess Puthenpurackal (Author), 2008, Analysis and Valuation of Bonus Certificates, Munich, GRIN Verlag, https://www.grin.com/document/118401
