Analysis and Valuation of Bonus Certificates

Diploma Thesis , 2008 , 90 Pages , Grade: 1,8

Business economics - Banking, Stock Exchanges, Insurance, Accounting

Since 1989, retail certificates have become core in the field of retail banking (Pilz 2006). Particularly, the stock crash between 2000 and 2003 has fostered the success story of these investment products because many private investors have sustained enormous losses with their stock exposures. Therefore, they have been looking for alternatives to traditional investment forms which are lower in risk but gaining satisfactory returns (Schiereck 2004).
In order to fall in line with this growing specific demand of investors, major German banks have invented the new asset class of retail certificates. These products can offer depositors characteristics for every market scenario as its explicit strength (Löhr and Cremers 2007).
This booming development reached its peak in December 2007, as German private investors hold 135 bn EUR of retail certificates in their deposits (Barthel 2008).
Because of their attractive risk-return profile, Bonus Certificates, which were issued for the first time by the German bank Sal. Oppenheim in 2003, have gained a key position in this sector with a market share of 21.9% (Fischer 2008). The barrage of newly issued products has led to the circumstance that many private investors are facing the problem of lack in transparency concerning the structure of Bonus Certificates.
The present diploma thesis intends to provide the reader an extensive overview on the investment segment of Bonus Certificates. Thereby the author focuses on the conception and pricing of this financial structured product in order to develop an investment guideline for investors, how to deal with this complex derivative. In particular, the author analyses the influence of the input factors, both on each embedded option component and on the Bonus Certificate as a whole. Hence, investors may get a better insight of the disproportionate valuation of Bonus Certificates over maturity.
Due to current negative market situation, the author has also a look into the impact of issuer’s default risk and barrier violation on Bonus Certificates.

Inhaltsverzeichnis (Table of Contents)

• 1 Introduction
• 1.1 Problem Definition
• 1.2 Procedure
• 2 Basics
• 2.1 Definition of Certificates
• 2.2 Components of Certificates
• 2.2.1 Fixed Income Securities
• 2.2.2 Stocks
• 2.2.3 Standard Derivatives
• 2.2.3.1 Options
• 2.2.3.2 Futures
• 2.2.4 Exotic Options
• 3 Benefits of Bonus Certificates
• 3.1 Investors
• 3.2 Issuers
• 3.3 The German Bonus Certificates Market
• 4 Characteristics of Bonus Certificates
• 4.1 Description of Bonus Certificates
• 4.1.1 Underlying
• 4.1.2 Conversion Ratio
• 4.1.3 Barrier
• 4.1.4 Bonus Level
• 4.1.5 Maturity
• 4.1.6 Default Risk
• 4.1.7 Costs
• 4.2 Design of Bonus Certificates
• 4.2.1 Zero-Strike-Call
• 4.2.2 Down-and-Out Put
• 4.2.3 Payoff-Profiles
• 4.3 Pricing of Bonus Certificates
• 4.3.1 Black-Scholes-Model
• 4.3.2 Underlying
• 4.3.3 Volatility
• 4.3.4 Dividends
• 4.3.5 Interest Rate
• 4.3.6 Maturity
• 4.3.7 Divergence of Pricing: Fair Value - Secondary Market
• 4.4 Taxation
• 4.5 Special Forms of Bonus Certificates
• 4.5.1 Capped Bonus Certificates
• 4.5.2 Quanto Bonus Certificates
• 4.5.3 Reverse Bonus Certificates
• 4.5.4 Multi Bonus Certificates
• 5 Empirical Analysis
• 5.1 Dresdner Bonus-Barrier-Certificate I
• 5.1.1 Description
• 5.1.2 Design
• 5.1.3 Pricing
• 5.1.4 Taxation
• 5.2 AGI Bonus Barrier Fund
• 5.2.1 Description
• 5.2.2 Design
• 5.2.3 Pricing
• 5.2.4 Taxation
• 5.3 Comparison: Dresdner Bonus-Barrier Certificate - AGI Bonus Barrier
• 5.4 Impact of current Stock Exchange Collapse on Bonus Certificates

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This thesis aims to analyze and value bonus certificates, a type of structured product widely traded in the German market. It explores the characteristics, design, pricing, and taxation of bonus certificates, examining their benefits for both investors and issuers. The thesis also examines the impact of the current stock exchange collapse on these certificates, providing a comprehensive understanding of their dynamics in a volatile market.

• Characteristics and Design of Bonus Certificates
• Pricing and Valuation of Bonus Certificates
• Taxation and Regulatory Aspects of Bonus Certificates
• Benefits of Bonus Certificates for Investors and Issuers
• Impact of Market Volatility on Bonus Certificates

Zusammenfassung der Kapitel (Chapter Summaries)

The first chapter introduces the topic of bonus certificates, outlining the problem definition and the procedure used in the thesis. Chapter two provides a foundation by defining certificates and their components, including fixed income securities, stocks, standard derivatives, and exotic options. Chapter three examines the benefits of bonus certificates for investors and issuers, as well as the dynamics of the German bonus certificates market.

Chapter four delves into the characteristics and design of bonus certificates, exploring various aspects such as underlying assets, conversion ratios, barriers, bonus levels, maturity, default risk, costs, and pricing models. It also discusses the design of specific types of bonus certificates, such as zero-strike-calls and down-and-out puts, alongside their payoff profiles. Chapter five presents an empirical analysis of two specific bonus certificates, examining their design, pricing, and taxation. It concludes by analyzing the impact of the current stock exchange collapse on bonus certificates.

Schlüsselwörter (Keywords)

Bonus certificates, structured products, derivatives, pricing models, Black-Scholes model, volatility, interest rates, maturity, taxation, market volatility, stock exchange collapse, investors, issuers, German market.

• College: University of Applied Sciences Essen
• Grade: 1,8
• Author: Dipl.-Kfm. (FH), BBA Jess Puthenpurackal (Author)
• Publication Year: 2008
• Pages: 90
• Catalog Number: V118401
• ISBN (eBook): 9783640211715
• ISBN (Book): 9783640211838
• Language: English
• Tags: Analysis, Valuation, Bonus, Certificates