Capital protection products

Capital protection products are the most defensive form of UBS Investment Products and are therefore suitable for investors with a low to moderate risk tolerance. The structure of capital protection products may vary greatly. For example, capital protection products may participate in a selected underlying asset with or without a Knock-Out Level, offer a coupon or be a special type of investment. One feature that is common to all capital protection products, however, is that they seek to provide either a high level of protection for the nominal amount at maturity, or complete protection. In return for the prospect of a minimum repayment on maturity, often 95 to 100 percent of the nominal amount, concessions must generally be made for participation in any upward movements in the underlying asset. The measures to achieve this include a below-average participation rate, averaging, a cap, a below-average coupon or a different method.

Regardless of the product structure the issuer risk must be taken into consideration: Should UBS become insolvent, the capital invested may be lost – irrespective of the performance of the underlying asset or other market parameters.



Overview

Capital Protection Certificate with Participation (1100)

Convertible Certificate (1110)

Barrier Capital Protection Certificate (1130)

Capital Protection Certificate with Coupon (1140)
 


 

UBS Capital Protection Note (UBS CPN)

SVSP: Capital Protection Certificate with Participation (1100)

Payoff diagramm UBS Capital Protection Note (Kapitalschutz mit Partizipation)


UBS Capital Protected Notes, or CPNs, have capital protection at maturity and at the same time offer the earning potential that can arise from the capital markets. To this end, CPNs (at least partly) participate in the price movements of selected underlying assets (e.g. index, equity basket or commodities and currencies). The structure offers uncapped participation in a possibly positive performance of the selected underlying asset. The pre-determined participation rate can vary. Depending on the product features, it can be proportional (either negative or positive) to the performance of the underlying asset. In general, higher capital protection is at the cost of the participation rate in price movements. Depending on the features, the capital protection at the end of the mostly several-year term is between 90 and 100 percent of the nominal amount.

With a capital protection of less than 100 percent, the nominal amount at maturity is not fully secured. A price increase of the underlying asset by maturity is needed to bridge the difference between the level of capital protection and 100 percent of the nominal amount and avoid losses at maturity.

A variant of the classic CPN is the capped CPN. With this protection product, investors accept a limitation of earning potential ("cap"). This means that investors only participate in possible price increases of the underlying asset until a certain level is reached and no further. In contrast, capped CPNs usually have a higher participation rate than classic CPNs. Irrespective of the product structure the issuer risk of UBS AG must be taken into consideration.

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UBS Exchangeable

SVSP: Convertible Certificate (1110)

Payoff diagramm UBS Exchangeable (Wandel-Zertifikat)

UBS Exchangeables resemble convertible bonds. While convertible bonds may be exchanged for shares in the same company that issues the bonds, UBS Exchangeables may also be converted into other underlying assets such as stocks in other companies, indices, commodities or the like. Since, at the time of issue, the strike price is usually set above the price of the underlying asset, investors should generally have a positive opinion with regard to the price performance of the underlying asset. The reason is that, if the underlying asset climbs above the strike price by maturity, the conversion is carried out and the investor gets the underlying asset delivered into his safekeeping account – unless the Exchangeable provides for an appropriate cash settlement instead of delivery of the underlying asset. If the underlying asset fails to climb above the strike price, however, the conversion is not carried out. The investor must then usually be satisfied with a bond paying a below-average rate of interest, which at least provides for repayment of the full nominal amount. The issuer risk must be taken into consideration, regardless of the product structure.

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UBS Barrier Capital Protection Note (UBS Barrier CPN)

SVSP: Barrier Capital Protection Certificate (1130)

Payoff diagramm UBS Barrier Capital Protection Note (Kapitalschutz mit Barriere)

UBS Barrier CPNs (Capital Protected Notes) have capital protection at maturity. The capital protection is generally 100 percent of the nominal amount, such that at maturity you receive back at least the capital invested on issue, regardless of the underlying asset. If capital protection is less than 100 percent, the minimum repayment at maturity is reduced accordingly.

UBS CPNs with a barrier (Knock-Out Level), often referred to as UBS Dolphin CPNs, also participate in price rises of the underlying asset (e.g. equity, index, currency pair, interest rate, commodity), usually with a participation rate of 100 percent. Participation is nevertheless limited: if the underlying asset rises to or above the Knock-Out Level (fixed on issue), there is no participation in the performance of the underlying asset and, at maturity, a predefined rebate is paid out, in addition to the nominal amount. The level of the rebate is usually expressed as a percentage of the nominal amount and, in most cases, is significantly below the opportunity for returns that participation in the underlying asset could provide.

As a result, investors should have a limited positive opinion of the underlying asset's upside potential (up to the Knock-Out Level as a maximum). If prices fall, investors also have capital protection at maturity. The issuer risk must be taken into consideration, regardless of the product structure.

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UBS Capital Protection Note with Coupon (UBS Coupon CPN)

SVSP: Capital Protection Certificate with Coupon (1140)

Payoff Diagramm UBS Capital Protection Note with Coupon (Kapitalschutz mit Coupon)

UBS Coupon CPNs (Capital Protected Notes) have capital protection at maturity. In other words, at the end of the mostly several-year term you receive back (normally) at least 95 percent of the nominal amount at all events. Depending on the features, the capital protection is generally between 95 and 100 percent of the nominal amount. In the case of Coupon CPNs, a coupon also offers attractive earnings opportunities. In order to receive the coupon on the fixed dates on a regular basis (usually once a year), however, the underlying asset must close at least at its initial value (price on issue) on the predefined observation date shortly beforehand. UBS Coupon CPNs often refer not only to one underlying asset, but to several. In this case, all the relevant underlying assets must close on the fixed observation date at least at their own particular initial value. If the coupon is not paid on a particular occasion, there is generally a new chance to receive the coupon (on the same conditions) on the next payment date (usually in the next year), until maturity. A special type of capital protection product with coupon is the UBS Callable Daily Range Accrual Note (CDRAN). During its term it generally acquires a coupon each and every day, provided the selected underlying asset remains within a defined range of prices.

If no coupon at all is paid during the whole term, investors receive on maturity only the percentage of the nominal amount that had been fixed from the start, with the result that no yield is obtained. If the percentage is less than 100 percent, investors even make a loss on their capital in this case. The issuer risk must be taken into consideration, regardless of the product structure.

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