Reverse trackers are very similar to standard trackers but have an inverse relationship with the underlying asset – should the price of the underlying asset fall, the price of the reverse tracker will rise. These products can also be referred to as bear certificates.

Example

Reverse tracker

Issuer:

ABC Bank

Issue date:

February 2005

Expiry date:

February 2010

Underlying Asset:

Lloyds TSB plc (current Lloyds price 475p)

Conversion ratio:

1:1

Strike:

800p

Exercise style:

European

Issue price:

325p

Figure 4 shows the inverse relationship the reverse tracker has with the
price of Lloyds TSB plc – if the share price falls 10p, then the reverse
tracker price would rise 10p and vice versa.

In effect, this is a Put option, but so deeply in-the-money as to have a linear price relationship with the underlying. However, should the underlying asset price increase dramatically towards the strike, the linear relationship will break down and the instrument will increasingly take on the characteristics of a standard Put option.

As with all trackers, no dividends are paid, but any income streams are
built into the capital value of the tracker over its lifetime – check the pricing supplement for details specific to each product.