Structured Derivatives: Certificates

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1 Structured Derivatives: Certificates Müge Türkkan Erste Securities İstanbul Derivatives, Product Development

2 Plan Brief information about derivatives Brief information about structured derivatives Regulatory authorities Main features of Turbo Ceritificates Main risks about certificates 2

3 Brief information about derivatives Derivatives are: Securities whose price is derived from one or more underlying assets. Their values are determined by the fluctuations in the underlying asset. -Most common derivatives traded: -Forwards -Futures -Options -Swap 3

4 Structured Derivatives Structured Derivatives are: designed to facilitate highly customized risk return objectives by combining a traditional security with a derivative. Structured products are replacing the usual payment features of a traditional securitiy with the non traditional payoffs derived from the perfomance of underlying assets. 4

5 Structured Derivatives Derivatives Exchange Traded in Turkey: Futures contracts (TurkDex) Options (2013 TurkDex &ISE) Structured Derivatives Exchange Traded in Turkey: Certificates (ISE) Warrants (ISE) 5

6 Structured Derivatives Certificates Certificates : Leveraged structured derivatives. Structurally accomplished by the combinations of: Bonds Options Issuer,Maturity, no additional obligations for the investors Strike,Intrinsic Value, Time Value, Leverage 6

7 Regulatory Authorities Capital Markets Board CMB Circular Serial:3 No37 on trading of Covered Warrants Istanbul Stock Exchange Policies about quoting rules of certificates (ISE Mandat No:400) Brokers Association of Turkey (TSPAKB) Risk Notification Form of Warrants and Similar derivatives 7

8 Main features of Turbo Certificates Certificates Certificates are securitised derivatives accomplishing payoffs due to the predetermined conditions of the incremental price movements of an underlying asset. Certificates are giving right but no obligations for its investors. Most common categories of certificates: Turbo Certificates Index Certificates Bonus Certificates Discount Certificates 8

9 Main features of Turbo Certificates Turbo Certificate Pricing Components Turbo Sertifika Fiyatı Oluşturan Turbo Certificate Bileşkenler Pricing Underlying Asset Dayanak Varlık Fiyatı Strike Exchange rate Currency rate Kullanım Fiyatı Dönüşüm Oranı Kur Oranı Cost of Carry Finansman Maliyeti Intrinsic Value Intrinsic Value of Turbo Long Certificates=((Underlying Asset - Strike) Intrinsic Value of Turbo Short Certificates=((Strike Underlying Asset) Turbo Certificates Pricing Formula = (Intrinsic Value X Currency rate X Exchange rate) + Cost of Carry Volatility has an indirect effect on the price of certificates 9

10 Main features of Turbo Certificates An example of Turbo Certificate Pricing Example: The Spot price of the underlying price of a WTI futures contract is 90.21USD on at 14:41 Strike:78.32 USD Exchange rate:0.1 USD/TRY currency rate: The theoretical price of the certificate with code EWTAA can be calculated as follows: =(90,21-78,32)X0.1X =2,134TL NYMEX WTI en yakın Vadeli İşlem Sözleşmesi (Foreks CL1) Uluslarası Serbest Döviz Piyasası USD/TRY (Reuters TRY=) IMKB Sertifika Pazarı (Reuters TRY=) The offer price of certificate is 2.17 TL. Therefore the cost of carry in this price is calculated to be 0.02TL excluding the minimum spread of 0.01TL. 10

11 share price Main features of Turbo Certificates Example 2: Turbo Long Garanti Certificate S(t)=6TL Underlying Asset investor issuer 4TL Credit 2.03TLInvestment Garanti Bank share Turbo Long Garanti Certificate Spot(t)=6 Strike:4TL Barrier:4.5TL Exchange Rate:1:1 Cost of Carry:0.02TL Certificate(t)=2.03TL Buy certificate for 2.03TL Garanti L Cert.(T) Bid Ask Market Maker 2.0 2,03 Buy share for 6TL Spot(t)=6TL 2TL 4TL 11

12 share price share price Main features of Turbo Certificates Example 2: Turbo Long Garanti Certificate S(t+1)=7TL Underlying Asset investor issuer 3TL Payment Garanti Bank share Sold certificate(t+1): 0.97TL Profit (%50) Bought certificate(t+1): 0.03TL Profit Garanti L.cert.(t+1) Bid Ask Market Maker 3.0 3,04 Spot(t+1)=7TL Strike:4TL Barrier:4.5TL Exchange Rate:1:1 Cost of Carry:0.03TL Certificate(t)=3.04TL S(t)=6TL 2TL 4TL constant credit amount, leveraged capital gain constant credit amount S(t+1)=7TL 3TL 4TL 12

13 share price share price Main features of Turbo Certificates Example 2: Turbo Long Garanti Certificate S(t+1)=7TL Garanti L Cert.(T) Bid Ask Market Maker 2.0 2,03 Garanti L.cert.(t+1) Bid Ask Market Maker 3.0 3,04 Delta=0.97/1=0.97 apprx. 1 Omega=0.48/0.17=2.82 apprx TL (48%) increase in certificate price Leverage:6/2.03=2.95 apprx 3 Omega=Leverage X Delta S(t+1)=7TL Spot(t+1)=7TL Strike:4TL Barrier:4.5TL Exchange Rate:1:1 Cost of Carry:0.03TL Certificate(t)=3.04TL S(t)=6TL 2TL 4TL constant credit amount, leveraged capital gain constant credit amount 3TL 4TL 13

14 share price share price Main features of Turbo Certificates Example 3: Turbo Long Garanti Certificate Strike=5TL Garanti L Cert.(T) Bid Ask Market Maker 1.0 1,02 Garanti L.cert.(t+1) Bid Ask Market Maker 2.0 2,03 Delta=0.96/1=0.96 apprx. 1 Omega=0.96/0.17=5.65 apprx TL (96%) increase in certificate price Leverage:6/1.02=5.88 apprx 6 Omega=Leverage X Delta S(t+1)=7TL Spot(t+1)=7TL Strike:5TL Barrier:5.5TL Exchange Rate:1:1 Cost of Carry:0.03TL Certificate(t)=3.04TL S(t)=6TL 1TL 5TL constant credit amount, leveraged capital gain constant credit amount 2TL 5TL 14

15 Main risks about Turbo Certificates Example 2: Turbo Long Garanti Certificate S(t+2)=4.5TL Knock out risk Garanti L Cert.(t) Bid Ask Market Maker 2.0 2,03 Garanti L.cert.(t+2) Bid Ask Market Maker Delta=1.53/1.5 apprx. 1 Omega=0.75/0.25 apprx 3 Spot(t+2)=4.5TL Strike:4TL Barrier:4.5TL Exchange Rate:1:1 Certificates are expired Quotes are delisted Leverage:6/2.03 apprx 3 Omega=Leverage X Delta 0.5TL Payment 1.53 TL Loss (-%76) Sold share: 4.5TL 1.5 Loss (-%25) In a case of knock out the investor can lose all the investment amount!! 15

16 Main risks about Turbo Certificates Example 3: Turbo Long Garanti Certificate S(t+2)=5.5TL Knock out: Leverage risk Garanti L Cert.(t) Bid Ask Market Maker 1.0 1,02 Garanti L.cert.(t+2) Bid Ask Market Maker Delta=0.52/0.5 apprx. 1 Omega=0.50/0.08 apprx 6.3 Spot(t+2)=5.5TL Strike:5TL Barrier:5.5TL Exchange Rate:1:1 Certificates are expired Quotes are delisted Leverage:6/1.020=5.9 apprx 6 Omega=Leverage X Delta 0.5TL Payment 0.52 TL Loss (-%50) Sold share: 5.5TL 0.5 Loss (-%8) In a case of knock out the investor can lose all the investment amount!! As the barrier gets closer to the spot price, the certificate becomes cheaper but more risky!! 16

17 Main risks about Turbo Certificates Currency risk Turbo Uzun WTI Sertifikası Döviz kuru simulasyonu Senaryo Petrol F. (USD) Dayanak Varlık F.değişim% Kullanım fiyatı Dönüşüm Oranı USD/TL Kurdaki değişim% Sertifika Teorik fiyat (TL) Sertifikadan elde edilen kar/zarar% Dayanak Varlığa Yatırımdan elde edilen kar/zarar% T günü % - USD/TL Petrol % % % 5% USD/TL Petrol % % % -27% USD/TL Petrol % % % 36% USD/TL Petrol % % % -5% USD/TL Petrol % % % -33% USD/TL Petrol % % % 23% USD/TL Petrol % % -30% USD/TL Petrol % % 30% Turbo Kısa WTI Sertifikası Döviz kuru simulasyonu Senaryo Petrol F. (USD) Dayanak Varlık F.değişim% Kullanım fiyatı Dönüşüm Oranı USD/TL Kurdaki değişim% Sertifika Teorik fiyat Teorik fiyattaki değişim% Dayanak Varlığa Yatırımdan elde edilen kar/zarar% T günü % - USD/TL Petrol % % % -5% USD/TL Petrol % % % 27% USD/TL Petrol % % % -36% USD/TL Petrol % % % 5% USD/TL Petrol % % % 33% USD/TL Petrol % % % -23% USD/TL Petrol % % 30% USD/TL Petrol % % -30% 17

18 Main risks about certificates Issuer risk S&P: Long term inv. : A Short term inv. : A -1 MOODY S: Long term inv. : A3 Short term inv. : P-2 18

19 Sertifikalara ilişkin iletişim adresleri Erste Menkul Değerler A.Ş. (212)

20 Yapılandırılmış Finansal Ürünler: Sertifikalar Teşekkürler!

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