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Airbag Certificates

Airbag certificates fully participate to the upside price performance of an underlying asset and have a certain amount of downside protection down to which the investor doesn’t incur any losses. In other words, as long as the underlying asset doesn’t lose more than a predefined level, the capital is 100% protected. That level is called the airbag, named after the automobile safety system placed in the steering wheel that lessens the injuries in case of an accident. Below the airbag level, the product starts to decrease in value at a leveraged pace compared to the underlying asset. However, it stays above the underlying asset until the asset loses all value. In essence, the product is not unlike Bonus Certificates, with the one big difference that the Airbag doesn’t knock-out. It stays until the maturity of the product no matter what. Hence, there is no gap (no vertical line in the payoff diagram) as in the Bonus certificate.

The level of the Airbag protection typically ranges between 90% and 70% of the spot price, thus generating between 10% and 30% protection.

Payoff Features

Airbag certificates are constructed using a long zero-strike call ratio, a short call ratio and a long at-the-money strike call. The ratio is the inverse of the airbag level. For instance, if the airbag level is set at 75%, then the ratio is 1/0.75=1.33. The ratio determines at which speed the product’s price decreases below the airbag level. In this case, for a 1% price decrease in the underlying asset (for example from 69% to 68%), the Airbag’s price would decrease by 1.33%.

Consider the following Airbag certificate example:

Stock: BASF, dividend yield of 5.5%

Maturity of the product: 2.5 years (includes 3 yearly dividends)

Airbag: 35%

Compare this structure to this Bonus Certificate. All other things remaining equal, the protection of the Airbag is 15% lower than the Bonus certificate’s. That’s because the Airbag’ s protection doesn’t disappear as the Bonus certificate does, once the threshold has been breached. As can be seen on the chart on the right, the Airbag’s payoff has no dotted line that would represent a “knocked-out” status, because there is none. The underlying asset can dip below the Airbag’s level and, if a rebound occurs, claw back up to the Airbag’s level.

Note that the protection is bought with the expected dividends (or yield) of the underlying asset. The higher the dividend, the larger the protection.

Do’s

Choose this structure when the implied dividend is high and expected to decrease in the future.
The product has better conditions when the product matures directly after a dividend date.
If you can’t achieve a reasonable Airbag level with a given underlying asset, try placing a cap on the structure (i.e. sell an additional call out-of-the-money).
You may also want to raise the strike of the at-the-money call to say, 105% of spot. You miss the first 5% of the asset’s performance, but the Airbag level can be increased substantially.

Don’ts

Don’t think that the lower protection of the Airbag is worth less than for an otherwise comparable Bonus certificate.
Don’t use an Airbag certificate if the Airbag is less than 10% for the time to maturity you have chosen, and that the time to maturity is longer than 1 year.
Don’t use an Airbag for maturities longer than 2 – 2.5 years.
Don’t try to force a low Airbag; if placing a cap, raising the strike and even using a worst-of don’t give you the desired Airbag level, then the structuring conditions are adverse and you should try another structure instead.

Classical variants

Capped Airbag: the participation cannot rise past the level o a predetermined cap (see payoff diagramm to the right).
Worst-of Airbag (seldom used structure). The participation and the Airbag can be on the worst-of, or the upside performance can be on the basket, but the downside performance below the Airbag level is on the worst performing asset.

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