The following terms are used in the example:

Determination Price:	$16.5
Cap Strike:	$18.0
Certificate Purchase Price:	$16.5
Share Price at Launch:	$16.5
Multiplier:	1

Suppose XYZ share drops to $16.5 on 13 Oct. An investor believes that there is support at current levels and the share price may potentially rise to around $18 in about 6 months’ time. He may consider a 6-month Double Chance Certificate on XYZ share.

Expected Scenario: XYZ share price is above the Determination Price but below the Cap Strike – Share price of XYZ trends up and reaches $17.5 as expected at expiry. The Double Chance Certificate will pay out in cash the Determination Price and 2 times the gains achieved above the Determination Price. For every Certificate, the investor will receive $18.5($16.5+2 x ($17.5-$16.5)) and make a $2 profit. Whereas if the investor had invested directly into XYZ share instead, he would have made only $1. However, the share price of XYZ at expiry maybe higher or lower than that expected by the investors.

Scenario 1: XYZ share price is above the Cap Strike – XYZ has performed better than expected. The Double Chance Certificate will pay out in cash the Determination Price and the maximum gain(i.e. 2 x the difference between Determination Price and Cap Strike). If the XYZ share price is $20.0 at expiry, for every Certificate the investor will receive maximum of $19.5 ($16.5 + 2 x ($18.0-$16.5)) and make a $3 profit.

Scenario 2: XYZ share price is below the Determination Price – XYZ has performed below expectation. For every Certificate, the investor will receive one XYZ share. In this case, the value of a Double Chance Certificate is the same as the underlying share. The investor has the flexibility to either sell or hold the share. During its lifetime, the designed market-maker will provide a 2-way price which will mainly be influenced by the underlying share price. The price may also be affected by the remaining time to maturity, volatility, interest rates and dividends.

1. Investors who believe underlying share will only have moderate gain – If the share remains within the expected price range at expiry, investors would receive double gains up to the Cap Strike.

2. Investors who already own the underlying share – Investors who have bought the underlying share at a higher price may consider switching to the Double Chance Certificate. As gains up to the Cap Strike are doubled, the investor may be able to achieve his breakeven price quicker. Suppose an investor buys XYZ at $19.2 but the share price has fallen to $16.5. If he believes that the share price has limited upside potential, he may consider switching to the Double Chance Certificate. Assuming he sells the shares and buys the Double Chance Certificate mentioned above and at expiry, XYZ share price rises to $18.1. The Certificate would have gained $3 and offset the $2.7 loss from the share sale. If he is still holding onto the share, he would be losing $1.1.

3. Investors who are unwilling to be exposed to additional downside risk – If the share price is lower than the Determination Price at expiry, investors will simply receive the underlying shares. This poses no additional risk compared with investing in the underlying shares.

Based on the terms stated above, we compare the returns between Double Chance Certificate and XYZ share at expiry.

Profit and Loss Diagram between Double Chance Certificate and XYZ share at expiry