Shaken or stirred? Did you know that it was not James Bond who first used this famous expression in the James Bond movie series—it was his opponent Dr. No. It wasn’t before the movie Goldfinger that James Bond actually started ordering his martini “shaken, not stirred”.
What is a capital protected certificate?
The purpose of a capital-protectedcertificate is to invest in an asset and to ensure that, at maturity, the investor receives at least a protected minimum level of capital, even if the asset price has dropped in value. This protected minimum may equal the initial investment or a percentage < 100% thereof.
How is capital protection achieved?
James Bond’s martini and the capital-protectedcertificate have something in common: there are two basic ways to create a capital-protectedcertificate— “shaking” or “stirring” in a metaphorical sense:
- Shaking. Invest in a zero-bond which pays the protected capital at maturity and buy anat-the-money call option to gain upside exposure to the underlying asset:
- Stirring. Invest in the underlying asset and buy an at-the money put option for downside protection:
What is the trade-off investors need to understand?
In practice, the devil is in the details: in the product design there is an important trade-off investors must consider between achieving a high upside participation on the one hand an achieving a high level of protection on the other hand: the higher the protection level you desire for a given price of the capital protected certificate, the lower the participation must be and vice versa as shown in the pay-off chart below:
To get a better sense of this trade-off and to better understand the risk and performance profile, please check out the short video below that analyzes capital protected certificates in our structured products factory application.
Why did James Bond care for shaken martinis in so many movies?
Apparently, the preference for shaken over stirred martinis came from James Bond’s creator Ian Fleming, who enjoyed martinis shaken by the German bartender Hans Schröder in Berlin’s Maison de France in the 1950s. Ian Fleming name-checked him in his novel Thrilling Cities, which was later used as basis for the movie Octopussy.
Straight up!
- The so-called time-value of a structured product tells you how its value changes over time – all other parameters being equal.
- Concave payoffs and payoffs that earn interest rates typically have negative time value, which means time works for you (since the negative time value shrinks towards maturity)
- By contrast, convex payoffs typically have positive time-value, which means time works against you (since the positive time value shrinks towards maturity)
