This paper considers the pricing of certificates on exchanges for retail investors. The contribution to the literature is twofold: (i) We provide the first theoretical model that analyzes the optimal, i.e. profit-maximizing price-setting policy of the issuer over a certificate's life time. Our model derives and examines the nexus between optimal markup and optimal spread inter-temporally set by the issuer, unhedgeable risk faced by the issuer, and investors' buying and selling decisions. (ii) Analyzing the German market for leverage certificates, we provide the first comprehensive empirical analysis of model-derived hypotheses on the issuers' pricing policies that accounts for possible endogeneity between markup and spread and concretizes the effects of unhedgeable risk, volume and order flow.

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