German technology firm SmartTra.de has developed a barrier hit risk tool to identify the probability of a barrier breach in structured certificates.

“The barrier hit risk discloses the risks that are associated with structured products,” said Simon Ullrich (pictured), CEO of SmartTra.de. “By selecting structured products with this parameter investors will find products that suit their risk appetite faster and easier. We see an increasing number of intermediaries that have recognised the benefits of monitoring the barrier hit risks of structured products and are now adjusting their risk management techniques for their clients.”

SmartTra.de’s barrier hit risk tool is published in cooperation with investment information platform wallstreet-online.de and covers 220.000 live bonus certificates across all issuers in Germany.

Citigroup is one of the structured products issuers in Germany that offers this information on its bonus certificates range. “We approached SmartTra.de with a request to create a tool to calculate the risk of a barrier being breached which is based on the implied volatility,” said Christine Romar, director, warrants and certificates, equities, Citigroup Global Markets Germany. “This functionality was launched in March and displays a knockout probability for all our bonus certificates available in the secondary market. We think it is important to have an independent third party providing the calculation.”

However, SmartTra.de is not the first to come up with a risk measuring tool for certificates in the German market as German derivatives association the DDV has offered a risk monitoring service to retail investors in cooperation with the European Derivatives Group (EDG) which assigns a risk class out of five risk classes in total, to each certificate, based on the Value at Risk (VaR), since 2012. This service includes an email alert sent by the DDV to retail investors as soon as the risk level of a certificate changes.

“UBS was the first issuer in the German market to publish the Barrier Hit Probability (BHP),” said Marcel Langer, head public distribution Switzerland/Germany. “Publication started at the end of October last year. We wanted to offer our clients a figure to help them asses the probability of a barrier hit event. Feedback from clients has been outstanding and the fact that various issuers and portals have also started to publish this or a similar figure speaks for itself.”

According to Lars Brandau, managing director at the DDV, this tool can be very helpful for investors as depending on the product category a barrier breach can result in high losses or can even mean total loss. However, said Romar, implied volatility is a better reference to calculate the barrier risk as it offers a forward-looking approach which is also used to calculate the price of the product.

“This figure is also closer to the value of the product,” said Romar. “Historical volatility is less relevant when different factors can bring uncertainty to the market. We have deliberately chosen to disclose this knockout probability only for bonus certificates as this offers investors the greatest added value. For traders investing in knockout certificates this barrier hit risk figure is less relevant, as this is a very short investment.”

According to Ullrich, to calculate the hi -probability for bonus certificates of the previous years, one needs market parameters such as the implied volatility, interest rate level and various levels of the underlying from the analysed observation period.

“The risk of a barrier breach of a partially protected certificate depends mostly on the underlying’s implied volatility,” said Ullrich. “This results from derivatives contracts that are completed between professional market participants.”

Citi’s Romar said that only one method should be used as reference as having two references to measure the same product will create confusion.

“I think that this figure, like all other added info/figures which enhance product transparency, is very important to investors,” said Romar. “It is not a tool to make investment decisions, but it makes the risk more tangible, increases safety and investors can better estimate what they are getting into. It is only an aid that decreases the gut instinct and offers a key figure for risk control, less surprises and increases the investment success for our investors.”

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