FVC review: Barclays issues reverse convertible on GoPro
Barclays has issued a six-month reverse convertible on US-listed camera maker GoPro. The product offers some downside protection via an American-style 70% barrier, though the stock has exhibited high volatility during its short life as a public company thus far
Barclays has issued a six-month reverse-convertible tied to the shares of GoPro, the US manufacturer famed for its rugged portable cameras. The product pays a monthly fixed coupon of 1%, equivalent to an annual fixed coupon of 12%. Investors' capital is at risk if a 70% American-style barrier is breached as of the closing-day price of the stock throughout the product term.
Points for
High income of 12% paid on a monthly basis (1% per payment).
Income stream is not dependent on the performance of the asset.
Points against
Principal is at risk if the closing-day barrier of 70% is breached during the monitoring period.
The return is limited to the income payments and fixed principal repayment. There is no participation in any appreciation in the value of the stock.
If the barrier is breached on any trading day, then some or all of an investor's capital will be at risk - although the fixed coupons on offer will go some way to reducing the loss on the investment. If the stock finishes below 94% of its initial level on any given day, then capital is lost on a total return basis.
Since GoPro was first listed in June 2014, the stock has exhibited large fluctuations in price. It started at an initial level of $31, before reaching a peak of $93.84 on the October 7. In the 10 months since flotation, the stock has had a historical volatility of around 80%. As this product has an American barrier that is observed daily, the investor should be wary of future potential breaches in the barrier due to the high volatility the stock has previously shown.
However, having such a short set of historic values, investors should also be aware this isn't a reliable gauge, as the stock has not yet been listed for a year and spot values can be misleading. In the case of such stocks, investors are frequently forced to rely on anecdotal evidence. For instance, the stock might have risen sharply in the latter months of 2014 due to a large number of consumers purchasing camera equipment in preparation for winter sports such as skiing and snowboarding during the holiday season. Investors in a product tied to a stock should have a strong view on the underlying, and be capable of making an assessment of expected yield versus risk.
This type of product is ideal for an investor requiring guaranteed coupons paid monthly over a period of time, who is also willing to take some added risk. Based on the current climate of low interest rates and low funding levels, this return is much higher than the current risk-free rate that is on offer.
If an investor chooses to invest directly into the stock instead of the reverse convertible, they forego the defensive features and guaranteed income that the product offers.
GoPro specialises in developing powerful cameras, capturing videos of sports activities. The company was formed in 2002 and has since become a leader in its field. GoPro was listed on the Nasdaq Stock Market in June 2014, an index that lists many technology firms, including Apple and Microsoft.
Pricing and risk
This product is aimed at investors who are either expecting moderate growth in the underlying, or are confident it will exhibit lower volatility than it has hitherto - so it does not breach the 70% barrier. A more bullish investor may look to invest in a leveraged return product, which could potentially offer the investor a higher yield should the underlying perform well. In this case, the underlying stock has a high implied volatility, offering much higher potential returns then a fixed-income product with limited or no growth opportunities.
Having a high-volatility stock as an underlying is advantageous for pricing a reverse convertible as it increases the risk of the product, which enables the issuer to pay a higher return through selling put options at a higher price. Having an American-style barrier also increases the risk taken on by the investor compared to a European barrier, as the stock level is measured daily instead of at maturity. This also contributes towards the higher riskmap score.
The information in this analysis is taken from sources which Future Value Consultants Limited deems reliable but no guarantee is made that the information is complete or accurate and it should not be relied upon as such. Any opinions in the analyses represent those of Future Value Consultants Limited at the time of writing but are subject to change. All valuations and prices shown are indicative only and do not imply an offer or commitment of any kind. The analysis does not constitute advice or recommendations nor should it be relied upon for any purpose. No liability whatsoever is accepted by Future Value Consultants Limited or Incisive Risk Information Limited for any loss or expense incurred from using this analysis.
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