Opportunities in Fragile Turkish Equity Markets: Turbo Certificates
Turbo certificate (" Turbo") is a derivative product that reacts with respect to an underlying asset is determined in advance. In comparison with direct investment to an underlying asset, Turbo certificates are riskier financial instruments that provides much more gain or losses. Turbo certificates are likely applicable in floating markets in connection with speculation opportunities on price increases and decreases.
On the other hand, Turbo certificate may be applied as a hedge instrument for diversified portfolios. Besides, these instruments enable to invest in numerous markets and products where normally investors are not capable of making direct investments.
Main Characteristics of Turbo Certificates
- Leverage participation allows investors to benefit from price volatility of an underlying asset with a lower cost.
- Turbo certificates can be categorized as turbo short and turbo long. Turbo long certificates give investors chance to benefit from rising prices of underlying asset whereas turbo short is an exceptional financial instrument that offers benefiting from equity markets downward trend.
- Maximum loss of a turbo certificate is the preliminary investment that investors made.
- Turbo certificates are traded by barrier level, in condition that underlying asset reaches this level, they became worthless. Even if there is a positive market price movement observed, turbo certificates remain straw.
- Underlying assets' price volatility equally drives turbo certificate's value as well as leverage effect.
Legal Structure of Investment Institutions' Certificates
According to article 6 of Capital Markets Board ("CMB") Communiqué VII No:128.3 the maturity of issued certificates including turbo certificates, shall be at least 2 months and at most 5 years. (sub clause 2). Furthermore, financial institutions can not apply the shares that represent their own capital as an underlying asset on turbo certificate issue. (sub clause 8 ). Thus, insider-trading risk could be mitigated by this regulation.
Recently Turkish Economy is Available for Structured Financial Products
TRY based turbo certificates will pioneer alternative financial investments through Borsa Istanbul (BIST) without any obstacles regarding investment to foreign financial markets. Capital market fluctuations will pioneer benefiting from Turbo certificates in terms of underlying that may be indexed to equity markets, commodities or stocks. To illustrate, investors could make exorbitant returns by invest in turbo certificates which are based on BIST30 last week. As a consequence of corruption allegations, approximately 11.55% tumble in prices observed in BIST30. Thus, turbo short investors had a great opportunity to acquire high returns. If potential risks of turbo certificates take into account, leverage risk, currency risk, knock-out risk and issuer risk are on the forefront. In the scope of Turkish economy, depreciation of TRY against foreign currencies and sharp slump in BIST30 fostered turbo short investors after latest political turmoil in Turkey.