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Bonus Outperformance Certificate

Category — Structured Products
By Nikita Bundzen Head of North America Fixed Income Department
Updated January 17, 2025

What is a Bonus Outperformance Certificate?

A bonus outperformance certificate is a financial instrument designed to offer investors the potential for higher returns than those offered by the underlying asset while also providing a certain degree of downside protection.

If the underlying asset increases, the price of the corresponding participation products, such as outperformance bonus certificates, typically increases as well. These products provide disproportionate participation in the positive performance of the underlying instruments, meaning the investor benefits more significantly from price increases than they would if they directly owned the underlying stock.

/></p> <h2>Bonus Outperformance Certificate Explained</h2> <p>A bonus outperformance certificate is a financial instrument designed to enhance investor returns while providing additional bonus protection. Unlike usual investments, these certificates afford disproportionate participation in the positive performance of the underlying instrument. This means that if the underlying instrument experiences an increase, the bonus outperformance certificate allows the investor to participate disproportionately in those upside gains, potentially leading to a higher profit.</p> <p>The structure of a bonus outperformance certificate includes several key components. The strike price is the level of the underlying asset at which the bonus factor ceases to apply. If the underlying trades above strike price, investor enjoys participation of more than 100% in the asset’s price appreciation. However, once the underlying falls below the strike price, the entire bonus factor disappears. From that point on, as long as the barrier is not breached, the investor receives a bonus equal to the strike price even if the asset’s value continues to decline. The bonus level is a predetermined threshold that once reached by underlying simply converts instrument in bonus certificate. That means that you’ll have incurred a 1:1 loss in step with the price decline of underlying.</p> <p>One of the main advantages of a bonus outperformance certificate is its downside protection level. This feature acts as a safety barrier, shielding the investor from falling prices of the underlying instrument as long as barrier not breached. The downside protection level ensures a minimum redemption value at maturity, even if the price of the underlying has decreased, offering a certain degree of capital protection.</p> <h2>Characteristics</h2> <ol> <li> <p><strong>Participation in Underlying.</strong> A bonus outperformance certificate allows investors to participate in the performance of the underlying instrument, with its value adjusting based on the underlying's changes.</p> </li> <li> <p><strong>Disproportionate Participation.</strong> The certificate affords disproportionate participation in the positive performance above the strike price, enhancing investor benefits from price increases.</p> </li> <li> <p><strong>Minimum Redemption.</strong> The minimum redemption value is equal to the strike price (bonus level) if the barrier level is not breached, ensuring a base return.</p> </li> <li> <p><strong>Barrier Breach Effect.</strong> If the barrier level is breached, the certificate changes into an outperformance certificate.</p> </li> <li> <p><strong>Reduced Risk.</strong> The certificate generally offers reduced risk compared to direct investment in the underlying instrument, with downside protection and a safety barrier against falling prices.</p> </li> </ol> <h2><strong>Market Expectation</strong></h2> <p>Market expectation plays a crucial role in the context of a bonus outperformance certificate. Investors typically choose such a certificate when they have specific expectations about the market and the underlying instrument's performance.</p> <ol> <li> <p><strong>Rising Underlying.</strong> Investors opting for a bonus outperformance certificate generally anticipate that the underlying instrument will experience positive performance. The certificate is designed to afford disproportionate participation in the gains of the underlying, meaning that as the underlying's value rises, the investor benefits more significantly than they would from a direct investment.</p> </li> <li> <p><strong>Barrier Breach Avoidance.</strong> Another key market expectation is that the underlying instrument will not breach the barrier level during the product's lifetime. The barrier acts as a safety measure, providing downside protection. If the underlying stays above this level, the certificate ensures a minimum redemption value equal to the strike price, offering a certain degree of capital protection. If investors believe that the underlying is unlikely to fall to the barrier level, they can confidently invest in the certificate, knowing they have this safety net.</p> </li> </ol> <h2>Structure</h2> <ol> <li> <p><strong>Combination of Certificates.</strong> The bonus outperformance certificate merges the characteristics of an outperformance certificate and a bonus certificate. This combination allows investors to benefit from both the potential for high returns and the safety of a predefined bonus level.</p> </li> <li> <p><strong>Unlimited Maximum Loss.</strong> One of the key features is that the maximum loss on the certificate is not limited. If the underlying instrument's price falls significantly, the investor could incur substantial losses. Therefore, while there is downside protection through the bonus level and barrier, the protection is not absolute.</p> </li> <li> <p><strong>Income Growth Beyond Strike.</strong> If the price of the underlying instrument exceeds the specified strike price, the income from the bonus outperformance certificate grows at a disproportionate participation rate. This means the investor's returns increase more significantly than the price of the underlying instrument itself, offering enhanced upside gains.</p> </li> </ol> <h2>Example</h2> <p>Consider an outperformance bonus certificate with a strike price set at the current price of an underlying instrument. The certificate includes a bonus dimension with a participation factor that allows the investor to benefit disproportionately from rising markets. If the underlying instrument's price increases, the investor receives returns greater than those of normal bonus certificates. However, if the price falls below a certain barrier level, the product may

FAQ

  • How does a bonus outperformance certificate differ from a discount certificate?

    While a discount certificate offers the underlying asset at a reduced price with limited upside, a bonus outperformance certificate provides a higher participation factor in rising markets, allowing investors to benefit more from price increases.

  • What should an investor expect from a bonus outperformance certificate?

    An investor expects to receive returns that exceed those of normal bonus certificates, particularly in rising markets. The certificate offers a cap on gains while providing downside protection through the bonus dimension and barrier level.

  • How is the payout structure of a bonus outperformance certificate designed?

    The payout structure is designed to afford disproportionate participation in the underlying instrument's positive performance. If the underlying instrument's price rises above the strike price, the investor receives higher returns. However, the investor may lose money if the price falls below the barrier level.

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