Discount Certificate

This type belongs to the yield enhancement category.
It gives an opportunity to buy an underlying asset at the price lower than the market one (with a discount, hence the name). The investor expects that the price of the underlying asset at the time of certificate expiration will be a little higher than the limit (cap), which allows getting the maximum yield. If the price of the underlying asset at the time of structured product expiration is lower than the cap, the investor will be given the underlying asset value (shares, currency, etc.). If the price is higher than the cap, the investor’s income will not grow, since the cap is limited.

Example. The price of a share of a factory is $ 100, the bank sells a certificate on these shares for $ 95, so an investor gets a chance to buy a structured product by $ 5 (5%) cheaper than its market price. The structured product expires in a year. The issue terms specify that the critical level (cap) for the factory’s share is 103.5%, or $ 103.5 (we multiply cap by the fixing level). It is maturity date.

Scenario 1. The share’s price is $ 103.5. The investor is paid $ 103.5 for each certificate bought. The annual income is 103.5- 95 = $ 8.5, or 8.94% p.a.
Scenario 2. The share’s price is $ 100, the certificate is converted into share. If the investor sells it now, the income will be $ 5.
Scenario 3. The share’s price is $ 95, the investor is charged the share to his account. If he sells it immediately, the income will be $ 0.
Scenario 4. The share’s price is $ 94, the investor is charged the share. If he sells it, his loss will be $ 1 (-1.05%). The loss occurs if the price falls lower than $ 95.
Scenario 5. The share’s price is $ 200. The investor gains the same sum as in Scenario 1, as its income is limited by the maximum level which is $ 103.5 per share.