Equity Protection Certificate

What are the Equity Protection Certificates?

Equity Protection Certificates are financial instruments belonging to the category of Capital Protected Certificates which allows the investment in the upward or downward trend of an underlying financial asset, such as, for example, a share, a stock index, a currency, a commodity or an interest rate. They are characterised by the protection at maturity, in whole or in part, of the value of the issue price of the Certificate in the event the underlying financial asset will move in the opposite direction compared to the expectations of the investor. The Equity Protection Certificate can be Long or Short. The long version allows the investor to participate in the rising trend of the underlying financial asset, while the short version invests in falling trends.

Who are Equity Protection Certificates suitable for?

Equity Protection Certificates are designed for investors with a propensity towards low risk (in the case of a level of protection equal to 100%) or investors with an average risk tolerance (in the case of protection levels less than 100%) with a view to a moderately bullish market (for the Long version) or a moderately bearish market (for the Short version). In general terms, given their characteristics, the Long Equity Protection Certificates are instruments suitable for investors who wish to benefit from any increases in the selected underlying asset.

Investment products that offer full(or partial) protection of the invested capital

Listing and trading of Equity Protection Certificates

Equity Protection Certificates are financial instruments that can be bought or sold, in Italy, either on SeDeX or EuroTLX, Multilateral Trading Facilities of the Italian Exchange. Methods and trading hours of such multilateral trading facilities are specified in the relevant Rule books, available on the website of the Italian Exchange. For example, trading in the continuous phase may take place on the open market days between 9:05am to 5:30pm on SeDeX and from 9:00am to 5:30pm on EuroTLX.

Characteristics of Equity Protection Certificates

UNDERLYING: a share, stock index, currency, commodity or any other financial asset upon which the value of the Certificate is dependant;
INITIAL EVALUATION VALUE or STRIKE PRICE: the initial evaluation price of the underlying asset on the date fixed at the time the Certificate is issued;
MATURITY: the date on which the Certificate ceases to exist or 'matures'
ISSUER: the financial intermediary issuing the Certificate;
MINIMUM LOT: the minimum number of Certificates that can be bought and sold;
ISIN: the alphanumeric code that uniquely identifies the financial instrument;
PROTECTION LEVEL: the minimum percentage of the issue price that is returned at maturity;
PARTICIPATION FACTOR: expressed as a percentage, representing the multiple value of the underlying performance paid to the investor;
CAP: the maximum share in the profits of the underlying that the issuer pays the holder of the Certificate;
CAP LEVEL: the maximum numerical threshold value of the underlying financial asset above which the investor ceases to participate in the favourable movement of the same;
MULTIPLIER: the number of underlying assets controlled by each Certificate and the ratio between the subscription price at the time the Certificate is issued and the Initial Reference Value of the underlying financial asset.

How do Equity Protection Certificates work

Equity Protection Certificates are instruments that allow for investments in rising or falling trends in the underlying financial asset, protecting in whole or in part, the value of the issue price of the Certificate at maturity.The level of protection, expressed as a percentage of the initial evaluation value of the underlying asset is determined when the instrument is issued. The Equity Protection Certificate may also have a maximum upper limit to participation in the movements of the underlying financial asset.This limit is called Cap Level. Depending on the characteristics established initially by the issuer, participation in the movements of the underlying may be less than, equal to or greater than 100%. The magnitude of the tracking performance of the underlying is indicated by the participation rate. Depending on the type and characteristics of Equity Protection certificates, at maturity of the Certificate there are several scenarios that an investor may come across. Assuming a Long Equity Protection certificate, there are three scenarios at maturity:

The final value of the underlying financial asset is less than the Protection Level: the investor receives a Settlement Amount equivalent to the level of capital protection;
The final value of the underlying financial asset is below the level of initial evaluation but higher than the level of protection: the investor suffers a loss and gets a settlement amount commensurate with the performance recorded by the underlying;
The final value of the underlying financial asset is higher than the initial evaluation level : the investor receives the positive performance to the extent provided by the participation factor.

In the case of Equity Protection Long Certificates with Cap, a further option can be added to the above mentioned scenarios, namely the final evaluation value of the underlying financial exceeds the Cap level at maturity: in this case, the investor will receive a settlement amount equal to the Cap itself, without benefitting from additional increases accrued by the underlying financial assets.

Example of how Equity Protection long cap certificates work.

Assume an Equity Protection Certificate with capital protection equal to 95% on the S&P 500 index and having the following characteristics:

Maturity	2 years
Issue Price	100 Eur
Date of initial value	21/07/2014
Initial reference value	1.900 points
Final evaluation date	21/07/2016
Participation factor	100%
Cap	140%
Cap level	2.660 points
Multiplier	0,0526

The possible scenarios that the investor may encounter at maturity:

Final reference value is equal to 2.800 index points.
The value is higher than the Cap level, equal to 2.660 points. The investor receives a settlement amount equal to 140 Eur per Certificate;
Final reference value is equal to 2.400 index points
The value is below the Cap level, equal to 2.660. In this case, when considering the settlement amount the participation factor, equal to 100% in this example, is taken into account.The investor receives a settlement amount equal to:
100 Eur + {100 Eur x 1 [(2.400 points/1.900 points)-1]} = 126,31Eur;
Final reference value is equal to 1.500 index points
Having a protection level equal to 95%, the Certificate does not expose the investor to the total losses experienced by the underlying during the lifetime of the Certificate. The investor suffers a loss limited to 5% and achieves a settlement amount equal to:
100 Eur x 95%= 95 Eur.

Payoff chart of Equity Protection Certificate long protection 95%

For further information on the terms you can consult the appropriate section GLOSSARY

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