Equity Blue

Volatility is the degree of price fluctuation of an underlying asset, for example a stock, stock index, commodity, currency, and any other tradable instrument and asset. It plays a key role at valuation of options and therefore significantly influences prices of bonus certificates. Market volatility is the effect of negative as well as positive market events. In distinctive moments volatility can be described as an over-activity, when the assets’ prices fluctuate in extreme directions. Mathematically, volatility is expressed as a standard deviation of price changes within a given timeframe. In finance the so-called annualized standard deviation is often used for volatility measuring. It is marked by the Greek letter of Sigma . Sigma is shown in percentage points per annum (p.a.). Volatility is not a constant value, it is changing over time. Generally there are several types of volatility. In financial media the so-called historical volatility (called as well realized volatilit...

Similarly as other instruments bonus certificates are traded in the so-called secondary market. It means they can be bought and/or sold any time before their maturities. Many investors do not hold bonus certificates until their maturities, they are rather trading them. Certificates are traded at stock exchanges (see the series of articles from August 2015) with the help of market makers that are usually the issuers of certificates at the same time. Market makers quote the bid and ask prices. In order to set the prices in real time, it is necessary to evaluate the certificates correctly. Let’s have a look, how the valuation of certificates practically works. Classical bonus certificates consist of two options, the Zero-Strike-Call and the Down-and-out-Put. The Zero-Strike-Call is an option to buy given underlying asset, and the Down-and-out-Put is an option to sell. The real time price of a bonus certificate is therefore derived from the valuations of the above mentioned options. T...

In the past six articles I presented the mechanisms of classical bonus certificates, which offer a partial safety in a form of a given safety barrier, an opportunity to obtain a bonus in maturity, and an unlimited profit potential in case of a strong growth of the price of the underlying asset. Thanks to the high variability of used options it is, however, possible to build further constructions, which allow investors to profit upon various market conditions and situations. Further types of bonus certificates are so-called Cap Bonus Certificates , Reverse Bonus Certificates , and Cap Reverse Bonus Certificates . Let's have a closer look on these types. Cap Bonus Certificates Cap Bonus certificates function very similarly as classical bonus certificates. The only difference is that these certificates do include a so-called cap. Cap is putting a limit on the maximal profit. While a classical bonus certificate can effectively participate on the growth of the value of the ...

The previous article provided a more detailed look on the types of options, which are the components of a bonus certificate. Namely the option type Zero-Strike-Call and the second option type Down-and-out-Put. It was mentioned that the Zero-Strike-Call is a buy option, which replicates the price development of the underlying asset, while the Down-and-out-Put is a so-called exotic sell option, whose intrinsic value develops between the level of bonus (this level is called strike at this type of option) and a so-called knock-out barrier. The Down-and-out-Put option becomes worthless if the value of its underlying asset grows above the given bonus level, i.e. strike, or below the knock-out barrier. Let’s now imagine the functionality of these two options on an example of a bonus certificate. We have a classical style bonus certificate, which has a share as an underlying asset. The maturity of this certificate is not really important in this example. Further parameters include the bon...