Investment Certificates – A Complete Guide


The investment certificates offer a diversified range of opportunities for the investors. The certificates are securitized derivative tools, this means that their value is strictly tied to that of other financial assets, called underlying.
These can vary among assets, indexes, ETFs and funds, primary resources and currencies.

The creation process of a certificate is generally started off by a distribution team which collaborates with the trading and structuring desk and the market maker. The issuers, mainly banks, create pre-packaged options, classic and alternative ones to structure products in line with market requirements.
For more complex products, an approval is requested from entities like the Italian Stock Exchange or Consob. This preliminary phase, essential to define terms and certificate conditions, is officially completed with the product listing on the market.

A mosaic of options and strategies
The attractiveness of investment certificates resides in their ability to access strategies and assets otherwise inaccessible to private investors, especially through exotic options. The most common strategies include partial protection or complete protection of the capital, periodic payment of dividends or maxi-coupons. However, this accessibility is accompanied by a complex web of potential risks, such as volatility, market fluctuations and issuer risks. For this reason, the investors need to follow a strict diligence process, balancing potential opportunities with connected risks.

Unveiling the functioning and types of investment certificates
A kaleidoscope of structures and revenues
Exploring the world of investment certificates, we encounter a variety of types, each with its own characteristics. Some of them, such as Tracker Certificates, aim to replicate the flow of a certain asset, while others, composed by a mix of plain vanilla options and exotic ones, offer more complex structures which are diversified too.
Today, in Italy, a new Dynamic Tracker Index was born, being certificates replicating an index which undergoes a periodic re-balancing based on the market trend. This diversification requires a deep comprehension in order to make a careful evaluation, keeping in mind not only the certificate structure but also the solidity and issuer reputation.
Dynamics of prices and revenues
The price of a certificate right when it is issued is influenced by three main factorsL the certificate structure, its specifics (barriers and expiration), variables of underlying price. These elements contribute to determining the revenue of the certificate along its lifetime, with an essential analysis of the market dynamics and underlying variables.
To simplify the concept we can say that a certificate with high capital protection level will give up part of the revenue, on the other hand a high periodic coupon will present higher risk.

Investment strategies and practical applications for investment certificates
Navigating through barriers and expirations
A crucial aspect when it comes to understanding investment certificates is the impact of the barriers and the frequency of the prize on revenue.
The protection barrier for the capital is inversely related to revenue: the more protective, the less the revenue. The barriers are usually calculated based on the Strike price. The Strike price is the underlying price when the issue is happening, this means that a certificate with four underlying titles will have as strike the prices of the four titles at t0.
A protection barrier set up at 70% means that the invested capital is protected until the price of the underlying loses at least 30% of its worth.
Similarly, the prize frequency influences the revenue in complex ways, interacting with the probability of anticipated expiration and risk of capital loss.
In some certificated, a prize frequency could increase the probability of anticipated expiry of the certificate; as a matter of fact, every time an evaluation takes place, which beats by a few days the issuing of the coupon, there could be a clause which allows anticipated refund og the certificate if some conditions have not been fulfilled.

The prize frequency could also influence the risk of capital loss. In some scenarios, a high price frequency could reduce the risk of capital loss, as the opportunities to receive revenues before a potential fall of the underlying price are higher. On the contrary, they could also mean lower revenue if the prizes are paid more frequently but with lower amounts.

In some portion, certificates too, such as obligationary titles are influenced by their duration.

Investment Strategies and Cases.

Thanks to case studies and market scenarios, we highlight how certificates can be used for multiple reasons: Portfolio diversification is the first objective which is researched by inserting certificates in the portfolio, in fact to allow exposition on more assets and markets.
The certificates are great tools to cover against volatility and losses providing a consistent revenue, not certain but likely.

Finally, the certificates can often be used to compensate for capital loss coming from other investments.
The capital losses are included in different revenues and can be made up for by coupons coming from investment certificates which are from the same family.
The Italian fiscal law allows compensation for capital losses in the following four years from their creation.
In conclusion, certificates can be absolutely valid tools for a good portfolio strategy allowing investors to have high flexibility.

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