With the new Oval Pro offering, targeted at more sophisticated retail investors that have a need to find returns from diversified asset classes, we are looking to offer a new financial product to the Oval brand, cash collect certificates.
Certificates like the ones we are introducing are only available for Oval Pro users as they require a solid understanding of investments, characteristics of structured products and their risks. The certificates are complex at times and can have higher levels of risk associated to them, so investors should take this into account when choosing to allocate a portion of their capital to these investments, and ask a financial consultant for advice if needed.
Cash collect certificates are structured products that have the following main characteristics:
- They are linked to the performance of one or more underlying indexes or single stocks of companies
- Periodic proceeds payments during the certificate’s life and at maturity if the underlying asset’s price has been higher than or equal to a certain level on the observation dates
- Barrier for capital protection. Each certificate has a barrier price as a percentage of the initial strike price of the underlying, whereby the underlying should not perform under in order for conditions to be met.
What does this mean?
These certificates are linked to one or a number of (usually not more than 5) indexes (eg. FTSEMIB, EUROSTOXX etc) or stocks of large companies (eg. Facebook, LVMH, BMW etc.) and they will behave according to the performance of the price of these securities over the full period of the certificate, until maturity.
Periodic proceeds are in the form of interest coupons, paid on a monthly basis. These happen regularly for the whole duration of the product and the amounts are calculated as:
[initial investment]*[interest rate]/12
For example for an investment of 10,000€ and a coupon rate of 12% every month the investor will receive, directly deposited into their bank account, 10,000*12%/12 = 100€.
Coupon payments can be fixed for the whole duration of the product or conditional. If conditional, they can or cannot have a memory effect.
- Fixed coupon - The product will always pay a coupon no matter the performance of the underlying.
- Conditional coupon with memory - On the observable date, the coupon is paid out if all the underlying securities have a price that is higher than the barrier price. Memory means that if for a number of consecutive months the coupon is not paid out, once all underlyings are back above the barrier, then the product will pay all missed coupons on this date. Using the example below of a 100€ coupon, if the payment is skipped for months 3,4 and 5, then on month 6 the investor will receive 400€; the current and the three skipped coupons.
- Conditional coupon without memory - The conditionality is the same as above but the product does not pay in the future coupons that were skipped due to the underlying being under the barrier.
Barriers exist both for the decision to pay out a coupon and for the protection of the initial capital invested. Barriers are set at the initial date of the certificate issuance. They can be between 90% of strike price all the way down to 45%. A barrier of 45% means the underlying security must be 55% lower than the strike price in order for the coupon not to be paid or the initial capital not to be protected.
At maturity the investor will therefore receive either:
- The 10,000€ initial investment [initial investment*100%] if the price of all the underlying securities is above the barrier of 45%.
- If at least one of the securities is below the barrier, it will get the final price of the certificate that will be lower than 45%*10,000€ = 4,500€, say for example 4,000€.
There is one final characteristic of these products. It is usually called autocall and as the word explains it allows investors to take advantage of a significant rally in price of the underlying securities.
If all the underlying securities on the observable dates of autocall, that usually happen monthly after an initial period, are above their initial strike price and thus they are all positive, then the maturity of the certificate is accelerated to this date and the investor will receive his full initial capital and all the coupons up until this date (early redemption).
Oval does not provide financial advice, you capital is at risk. The product is intended to be offered to retail investors who fulfill all of the criteria below: they are sophisticated and experienced in trading complex securities; they are looking for an investment opportunity that reflects an expectation that the underlying will slightly decreases in value over time; they are able to bear a total loss of the amount invested; they have a medium-term investment horizon.