The certificate is an alternative investment instrument that joins the more traditional financial products such as shares or bonds. It is a derivative structured financial product, i.e. it allows returns to be obtained based on the performance of other underlying assets (such as shares, indices, currencies, interest rates…) on which their value depends. The certificates can be listed on regulated markets, and in this case, in Italy, the reference markets are the SeDeX of Borsa Italiana and the EuroTLX.
Among the key elements that characterize these tools we find:
– underlying: financial instrument (share, share index, currency, commodity, interest rate, basket of shares and/or indices ...) on which the value of the certificate depends;
– initial reference value (strike): value of the underlying asset defined at issuance and used as a parameter for calculating the various reference levels on which the payoff of the certificate depends;
– final reference value: value of the underlying asset recognized close to maturity which is used to determine the redemption value of the certificate;
– barrier level: present in investment certificates in which there is conditional capital protection, it represents the value of the underlying financial asset below which the investor loses capital protection
– premium/bonus: depending on the structure, some certificates may provide for the payment of intermediate and/or maturity premiums upon the occurrence of certain conditions or unconditionally.
CAPITAL PROTECTION AND DIFFERENT TYPES OF CERTIFICATES
Based on the different types, the certificates can be distinguished according to the capital protection:
– certificates with protected capital: they offer partial or total protection of the capital, repaying the issue price or a predefined percentage of it at maturity;
– certificates with conditionally protected capital: on maturity they repay an amount not lower than the issue price if the barrier event does not occur, ie the capital protection is conditional on the underlying financial asset not reaching the barrier level.
– certificates with unprotected capital: the peculiarity of these certificates is that they do not have any form of protection at maturity.
WHY INVEST IN INVESTMENT CERTIFICATES
Certificates offer an alternative to existing financial investment opportunities such as stocks or bonds, and offer a wide range of structures that you can use. Those who decide to invest in these instruments have the possibility to choose from a wide range of underlying assets such as shares, indices, currencies, commodities or combinations of them, thus being able to invest even in inaccessible underlying assets and diversifying their portfolio of investments.
The main advantages that characterize an investment certificate are:
– Reduced initial investment: generally these instruments are listed on the market with a minimum denomination of Euro 100 or Euro 1.000 and therefore are accessible to a wide range of potential investors;
– Capital Protection: unlike a share investment, investment certificates can offer protection of the invested capital which can be partial, total or conditioned by the performance of the financial asset on which the value of the Certificate depends;
– Portfolio diversification: thanks to the Certificates it is possible to invest in otherwise inaccessible underlyings and choose the investment time horizon that best suits one's needs;
– Tax treatment: the income generated by the certificates is treated as other income with the consequent possibility of offsetting the capital gains with any prior capital losses. Even the premiums or bonuses eventually paid during the life of the certificates are recognized as "other income of a financial nature" and can be used to offset any prior capital losses also generated by other types of investments;
– Trading: The Certificates are listed on regulated markets and can be purchased and resold even before expiry at the market price.
WE ANALYZE 2 TYPES OF CERTIFICATES
In order to better understand how investment certificates work, we decided to analyze 2 types of products that are currently very popular on the Italian market: Bonus Caps and Cash Collects.
Cap Bonus
– The Bonus Cap makes it possible to obtain a return in the event of increases, stability or moderate decreases in the underlying financial asset: in fact, the issue price corresponds to maturity plus a premium (the Bonus) if the underlying has a value greater than or equal to a certain level (called the Barrier Level). Let's take as an example an investment of Euro 100 for a Bonus Cap on an Italian share; let's assume the barrier level at 75% of the initial reference value (Euro 10) and the Bonus at 110%. At maturity, if the value of the share should be equal to or greater than Euro 7,5 (75% of Euro 10), the Certificate will pay an amount equal to Euro 110. Conversely, if the value should be below the Euro barrier 7,5 (for example Euro 6), the investor loses the protection and the certificate repays an amount commensurate with the performance of the underlying (in the example shown it would repay Euro 60, or 40% less than the Issue Price).
Precisely within this type of certificate, Banca IMI, one of the main financial institutions specialized in the listing of these products, listed its new range of Bonus Cap Certificates on European shares on 6 June 2017 on the SeDeX of Borsa Italiana. For more information: https://www.bancaimi.prodottiequotazioni.com/bonus_cap_certificate_giu2017
Cash Collect
– Cash Collects have the peculiarity of paying periodic premiums throughout the life of the certificate. The rewards that the investor obtains can be unconditional (ie independent of the value of the underlying) and/or conditioned on the performance of the same. To understand how it works, let's analyze the investment of Euro 100 on a cash collect on an Italian share. We assume a duration of the certificate equal to 12 months and a Barrier Level equal to 75% of the Initial Reference Value; the Certificate pays 4 unconditional fixed premiums for the first 4 months (premium equal to Euro 1) and 8 conditional monthly premiums (premium equal to Euro 1) from the 5th month until expiry. For the first 4 months, the investor will receive a total of Euro 4 (monthly premium of 1%) regardless of the performance of the underlying stock, while for the following 8 months the premium will be received if, on the monthly valuation dates, the value of the underlying is equal to or greater than Euro 7,5 (75% of the strike). At the end of the life of the certificate, the investor will receive the amount of Euro 100 increased by the last premium should the value of the underlying share be equal to or greater than Euro 7,5; otherwise, an amount commensurate with the negative performance of the underlying will be repaid (if it were – 40%, the certificate would repay Euro 60).
– Among the main issuers of this type of structure is Banca IMI which on 15 June listed 8 new Cash Collects with underlying European and American shares. For more information: https://www.bancaimi.prodottiequotazioni.com/certificate_cash_collect_giu2017
