Investors seek to profit disproportionately from a sharp rise in the price of an underlying asset in the short term and to increase their returns compared to a direct investment. At the same time, they anticipate significant price increases.
How do outperformance certificates work?
With outperformance certificates, above-average returns can be achieved even in moderately rising markets. Upon issuance, investors typically purchase this product at a price similar to that of the underlying asset. If the predetermined strike price is exceeded, investors can benefit disproportionately from the price gains.
This is made possible by built-in leverage, which ensures above-average performance once a certain strike price is reached. The amount of profit depends on the so-called participation factor. This factor indicates by how much more the certificate rises relative to the underlying asset. Typically, the participation factor ranges between 120 and 200 percent, which corresponds to leverage of 1.2 to 2. The more the underlying asset rises, the more the investor benefits. If the price of the underlying asset falls, the outperformance certificate tracks the underlying asset accordingly. The leverage therefore takes effect above the strike price when prices rise.
What to keep in mind
Investors should definitely be optimistic about the performance of the underlying asset. If the value rises, the potential return is disproportionately high. If the value falls, the risk is no greater than with a direct investment in the underlying asset. The potential loss corresponds to the performance of the underlying asset.
