Professional Documents
Culture Documents
Certificates
Guide
Season your strategy
www.nyseeuronext.com
2008 © NYSE Euronext, Inc. All Rights Reserved.
AMSTERDAM BRUSSELS CHICAGO LISBON LONDON NEW YORK PARIS SAN FRANCISCO
SR/ID/022008/500
Contents
Contents 2
What is a warrant? 3
What is a certificate? 3
Segmentation 6
Code 8
Product denomination 9
Appendix 16
Glossary 18
Contacts 20
2
What is a warrant?
A warrant is a financial instrument that can be traded • Security
on the stock exchange. It gives the holder the right, The issue of warrants and certificates is controlled
but not the obligation, to buy (in the case of a call and approved by the financial market regulator of
warrant) or to sell (in the case of a put warrant) an any EU member state. They are traded on
underlying asset at a predetermined price (the strike NextWarrants®, the dedicated product segment of
price or exercise price) up to a given date (expiry). Euronext, the European subsidiary of
The life of the warrant terminates on that date. The NYSE Euronext.
price the buyer pays for this right is less than that of
the underlying asset. Warrants and certificates offer additional benefits,
specific to their structure:
What is a certificate? • Leverage
Certificates are listed securities with the legal The price you pay for the warrant or certificate is
character of a complex debt instrument. They are often considerably lower than that of the
issued by banks and have settlement terms on expiry underlying asset. This enables investors to take
that are known and guaranteed at the time of issue. advantage of movements in the price of the
There are several types of product, each with a underlying securities for a relatively modest outlay.
specific investment and risk profile. The leverage or gearing is represented by the
number of warrants or certificates the investor can
What are their advantages? purchase for a sum equivalent to the price of the
As exchange-listed products, warrants and certificates underlying asset. The effect is measured by
offer a variety of benefits: dividing the underlying asset price by the warrant
• Simplicity or certificate price (adjusted for parity).
Warrants and certificates can be traded on the
stock market, just like shares. Investors can put • Risk limited to original investment
on or close positions whenever the market is open, Warrant and certificate investors always know the
by buying or selling the instruments. maximum loss they can incur, which is not the
case with futures contracts, options or Deferred
• Liquidity Settlement Service transactions. In the worst case,
The liquidity of warrants and certificates is they cannot lose more than the amount of their
ensured by their issuer, who undertakes to provide initial investment - the warrant or certificate price.
a buy price and a sell price at all times.
• Transparency
Detailed information about the nature of each
product is available from the issuer’s website and
from that of NYSE Euronext.
4
• Diversification
Because of the wide variety of asset classes,
sectors and geographical regions to which they
provide access, warrants and certificates enable
you to diversify an existing portfolio, consisting of
What underlying assets
traditional asset classes like shares and bonds, at
lower cost. are available?
Warrants and certificates provide access to a steadily
growing number of underlying assets: currently over
• Hedging
350. These break down into six major asset classes:
The price of certain warrants and certificates
moves in the opposite direction to that of the - Domestic and foreign equities
underlying assets. This allows investors to hedge - Baskets of domestic, foreign and themed
their portfolio against the risk of a fall in the equities
market or to take advantage of a decline in the - National, international and sector indices
price of the underlying securities. - Foreign exchange
- Commodities
• Anticipating trends
- Interest rates
Warrants and certificates, which can have a
maturity of several years, enable investors to
benefit from the anticipated performance of an What is the warrant and certificate
underlying asset in return for a modest segment?
investment. Rather than funding the purchase of NYSE Euronext created this segment in 2002 to bring
the underlying immediately, they can wait for the together all the warrants and certificates listed on its
ideal moment at which to buy the asset at the different markets, and to raise the visibility of these
predetermined price. Conversely, some warrants products in order to facilitate their access.
and certificates (puts) allow investors to defer The number of listed products varies as new ones are
selling assets in their portfolio, while protecting issued, existing products mature and replacements
them against the risk of a fall in price. arise in response to new market conditions. This
responsiveness ensures that investors have access to
products that are always in sync with financial market
trends.
5
The first level of segmentation distinguishes between « investment products » and « leverage products ».
Investment product:
Product with a risk profile close to that of the
underlying asset, but which offers certain benefits
in terms of performance or protection.
Leverage products:
Investors can lose their entire investment. The
product is designed either to amplify or to invert
the performance of the underlying asset.
It is important that you clearly understand Euronext’s denomination for its warrants and certificates, as you will
encounter them every time you place an order for these products.
The denomination consists of a short name specifying each individual product. The purpose is to provide
enough concise information for investors to correctly evaluate the type of product. Issuers are currently
harmonising the naming conventions for warrants and certificates, which should result in a new standard for
designating these products.
A B C 1 1 0 C 0 91 2 X
Product types
Investment products
Knock-out feature No No No
Trigger that alters the nature of the
No No Variable
product
Lower limit No Yes Variable
Profit
Profit
Loss
Underlying Certificate Loss
Graph: warrant/certificate simulation Underlying Bonus Discount Jet Airbag
(at expiry)
Profit
Protection
level
% participation
in upside
Leverage products
Plain vanilla warrant Spread (combination of options)
Bear indexation Digital with double knock-out Leverage knock-out
Call Put Call Put
Significantly greater
Opposite of the underlying Greater than the underlying Greater than the underlying Far greater than the underlying
than the underlying
ST to LT ST to MT ST to MT ST to MT ST to MT
Limited to Limited to
Limited to the underlying
No the underlying Yes Yes No the underlying
asset value
asset value asset value
No No Variable No No
Knock-out if
Strike Strike bought Strike sold Knock-out Knock-out
single barrier
Knock-out if
Knocks out product Strike Strike sold Strike bought Knock-out Knock-out
single barrier
Profit
Profit Profit
Upper
limits
Entry level
0
0
0
Knock-out Knock-out
Lower limits
Loss
Certificate Underlying Put
Loss Call Underlying Put Loss Call Underlying
Profit
Profit
Knock-out
barriers
Strike price
0
ST: Short Term: less than 6 months Knock-out barrier: the product matures prematurely if the underlying reaches this
MT: Medium Term: between 6 and 18 months level.
LT: Long Term: more than 18 months Trigger that alters the nature of product: certain characteristics of the product are
permanently altered if the underlying reaches this level
12
Investment products
The investor expects the underlying to go up in value The investor expects the underlying asset value to
and does not wish, or is not able, to invest in it rise, is not convinced of the potential increase and
directly. wishes to limit the losses in the event that the
Pure indexation: performance will exactly match anticipated scenario does not occur.
that of the underlying asset. The potential profit Capital protection: risk is limited by the protection
will not be leveraged, but it is theoretically level, while the potential profit is generally limited
unlimited. Potential losses are the same as those to a specific percentage of the performance of the
in the underlying asset value. underlying.
Leverage products The investor firmly expects a modest rise or fall in the
value of the underlying, thinks that the scale of the
The investor firmly expects the underlying to fall in rise or fall in value will be limited, wishes to gain
value. exposure to the underlying, and is prepared to accept
Bear indexation: the performance is opposite to a higher risk level than that associated with the
that of the underlying. If the underlying asset underlying itself.
value falls, the investment will generate a return of Spreads (combination of options): the level of risk
the same percentage (negative leverage of 1). If and reward is comparable to that of plain vanilla
the underlying asset value rises beyond a certain warrants, for a smaller investment. If the rise or
level, the product will be ‘knocked out’ and the fall in value anticipated by the investor does not
investor will lose his entire investment. occur (the underlying goes down in value rather
than rising or vice versa), the losses will be
The investor firmly expects the value of the underlying smaller than would be incurred using a plain
to rise or to fall, wants to gain exposure to the vanilla warrant. If the underlying asset performs
underlying and is prepared to accept a greater level of better than anticipated (it rises or falls more than
risk than that represented by the underlying itself. expected), the gains will be less than would be
Plain vanilla warrant: the potential performance achieved using a plain vanilla warrant (potential
(gain or loss) is multiplied by leverage. This returns subject to upper limit). In all other cases,
depends on numerous factors, including the strike the returns will be greater than would be obtained
price, the expiry date and the volatility of the using a plain vanilla warrant, as the sale of one
underlying. The gains are theoretically unlimited. warrant partially finances the purchase of the
The level of the potential profit correlates with the other.
level of risk accepted. Potential losses are limited
to the initial investment. Losses could result from The investor firmly expects a limited movement in the
two factors: value of the underlying, wants to gain exposure to the
- The passage of time: the value of the warrant asset in question and is prepared to accept a greater level
declines as it approaches its expiry date. of risk than that represented by the underlying itself.
- Expiry below the strike price for a call Digital knock-out: the potential gain is limited to a
warrant or above the strike price for a put fixed return on expiry. The investor could lose the
warrant: the investment is lost if the strike entire investment if the underlying asset value
price is not reached by the expiry date. reaches or passes one of the two limits set on
Warrants that are firmly out of the money issue. The narrower the gap between the
(with a very high strike price in the case of a underlying asset value and the two limits, the
call or a very low one for a put) are cheaper greater the risk and the greater the profit
(and offer greater leverage), but there is a potential.
greater risk that they will expire without
value. The investor firmly expects the value of the underlying
to move in the short term, thinks that this rise or fall
will occur without a return of trend, wishes to gain
exposure to the underlying, and is prepared to accept a
greater level of risk than that represented by the
underlying itself.
Leverage knock-out: the potential gain is
comparable to that for plain vanilla warrants, but
the required investment is lower. In other words,
the leverage is greater than that offered by plain
vanilla warrants. The investor could lose the entire
investment if the underlying asset value reaches or
passes a lower limit (call) or upper limit (put) set
on issue. The narrower the gap between the
underlying asset value and the limit, the greater
the risk and the greater the profit potential.
14
Continuous trading
Warrants and certificates can be bought and resold
continuously between 9.05 a.m. and 5.30 p.m. on
every market trading day. The order book is electronic,
which means orders are executed automatically. The
financial intermediary is free to set the trading fees.
Euronext has established specific rules for the
segment, in view of the characteristics of warrants
and certificates and the need to protect investors.
Trading in a warrant or certificate may, for instance,
be suspended if an order entering the system will
result in too significant a price movement. All issuers
are subject to liquidity contracts to ensure that
investors can buy or sell warrants and certificates at
any time and at fair prices. Liquidity providers have to
offer maximum bid-ask Spreads and minimum
quantities throughout the trading day. Euronext can
release liquidity providers from their obligations under Designator and order type
unusual market conditions. To place an order, the investor has to specify the
warrant or certificate’s ISIN code or Euronext symbol.
The order quantity must respect the unit of trade. The
entire range of orders available on Euronext can be
used: « limit », « market », « market-to-limit » and
« stop » orders. It is advisable, however, to use limit
orders for warrants and certificates, as price
movements can be very fast.
3- Set targets
As an investor, you have to
7- Understand
set yourself buying and
the
selling targets. It is vital to time your purchase
valuation
correctly. Once the predicted scenario has occurred,
factors
you must not hesitate to close your position and take The valuation of some products is easy to understand:
your profit. Conversely, you must not hesitate to close it basically depends on movements in the value of the
your position in order to limit your losses. This underlying asset. Others, by contrast, are complicated,
strategy is all the more important when dealing with involving factors like time value and volatility. You
leverage products and products sensitive to time need to master concepts like this before investing in
value. products of this kind.
Appendix
• Legal form
Warrants are financial products, whereas options
are contracts. Options are traded on the Liffe®
options market. Warrants are traded on the stock
market like shares, in the dedicated segment of
the regulated markets of Euronext, the European
subsidiary of NYSE Euronext.
• Accessibility
Warrants can be bought or sold via a regular
securities account. You need to open a special • Standardisation
account to trade options. Options are standard contracts: expiry date, strike
price and parity for the same underlying asset are
standardised. It is up to the issuing banks, by
contrast, to decide the characteristics of warrants:
a wide range of expiry dates, strike prices and
parities is often available for the same underlying.
• Issue capacity
An unlimited number of options can be issued on
the same asset class. The number of warrants
issued with a given maturity and strike price is
limited and chosen by the issuer, which can
influence the valuation of the warrants.
17
• Legal form
ETFs are variable capital investment funds. Their
assets vary as investors subscribe to and withdraw
from them. Certificates are issued in limited
numbers, which can influence their valuation.
• Maturity
ETFs have an unlimited life. Certificates can have
an expiry date.
• Distribution
ETFs can distribute dividends. This is not always
the case for certificates.
• Liquidity
Generally speaking, the issuer of a certificate is
also the counterparty for transactions in it. The
secondary ETF market is ensured by market-
makers independent of the issuer.
18
Glossary
American warrant Knock-out
A warrant is referred to as ‘American’ when it can be If the market price of the underlying passes the knock-out
exercised at any time between issue and expiry. level, the right conferred by the product is cancelled.
Gearing Volatility
Ratio of the price of the underlying to the product price, Indicator of the likelihood that an asset will fluctuate in
adjusted for parity. value. Volatility is calculated mathematically as the
annualised standard deviation of the returns on the
In the money underlying.
A call product is ‘in the money’ when the price of the
underlying is higher than the strike. A put product is in the
money when the price of the underlying is lower than the
strike.
Intrinsic value
The positive difference between the price of the underlying
and the strike price in the case of a call product, or the
positive difference between the strike price and the price of
the underlying in the case of a put product.
19
NYSE Euronext, a holding company created by the combination of NYSE Group®, Inc. and
Euronext N.V., commenced trading on 4 April 2007. NYSE Euronext (NYSE/New York and
Euronext/Paris: NYX) operates the world’s largest and most liquid exchange group and offers
the most diverse array of financial products and services. NYSE Euronext, which brings
together six cash equities exchanges in five countries and six derivatives exchanges, is a world
leader for listings, trading in cash equities, equity and interest rate derivatives, bonds and the
distribution of market data. Representing a combined $30.5 trillion/20.9 trillion total market
$141 billion/103 billion (as of 31 December 2007), NYSE Euronext seeks to provide the
highest standards of market quality and integrity, innovative products and services to
Contacts
For futher information, log on to www.nyseeuronext.com
If you have any question about warrants & certificates,
e-mail us at: warrants.news@euronext.com
Amsterdam London
P.O. Box 19163 Cannon Bridge House
1000 GD Amsterdam 1 Cousin Lane
The Netherlands London EC4R 3XX
Tel. +31 (0)20 550 5555 United Kingdom
Fax +31 (0)20 550 4900 Tel. +44 (0)20 7623 0444
Fax +44 (0)20 7588 3624
Brussels
Palais de la Bourse/Beurspaleis Paris
Place de la Bourse/Beursplein 39, rue Cambon
1000 Brussels 75039 Paris Cedex 01
Belgium France
Tel. +32 (0)2 509 12 11 Tel. +33 (0)1 49 27 10 00
Fax +32 (0)2 509 12 12 Fax +33 (0)1 49 27 11 71
Lisbon
Av. de Liberdade, Nj 196 – 7 Piso
1250- 147 Lisbon
Portugal
Tel. +351 (0)21 790 00 00
Fax +351 (0)21 795 20 26
This publication is solely intended as information and does not constitute any investment advice or an offer, solicitation or recommendation to acquire
or dispose of any investment or to engage in any transaction. Although this publication is issued in good faith, no representation or warranty, express or
implied, is or will be made and no responsibility or liability is or will be accepted by NYSE Euronext or by any of its officers, employees or agents in
relation to the accuracy or completeness of this publication and any such liability is expressly disclaimed. No information set out or referred to in this
publication shall form the basis of any contract. The creation of rights and obligations in respect of financial products that are traded on the exchanges
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your own opinion as to whether investments are appropriate or relevant and recommends you not to make any decisions on the basis of the information
contained in this publication before checking it, as you will bear full responsibility for any use that you make of it. Persons wishing to trade products
available on NYSE Euronext markets or wishing to offer such products to third parties are advised, before doing so, to check their legal and regulatory
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NYSE Euronext. No part of it may be redistributed or reproduced in any form or by any means or used to make any derivative work (such as translation,
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references to NYSE Euronext in this publication include each and any such company as the context dictates. NYSE EuronextSM, NYSE Group®,
Euronext®, Liffe®, NextWarrants® NextTracks® and Trackers® are registered marks of NYSE Euronext.
www.nyseeuronext.com
2008 © NYSE Euronext, Inc. All Rights Reserved.
AMSTERDAM BRUSSELS CHICAGO LISBON LONDON NEW YORK PARIS SAN FRANCISCO
SR/ID/022008/500
Investment
products
Investment products
Capital
Pure indexation Yield enhancement
protection
Capital
Pure indexation Airbag Bonus Discount Jet/Sprint
protection
Bull and Bull and Bull and Neutral to slightly Moderately
Investment strategy Bull
defensive defensive defensive bullish bullish
MT to LT, ST to LT,
LT MT
Investment horizon ST to LT according to according to ST to MT
(2 to 3 years) (average 1 year)
product life product life
Knock-out No No No No No No
Trigger that alters the nature
No No No Yes No No
of the product
Lower limit No Yes Yes Yes No Yes
Upper limit No No Variable Yes Yes Yes
Capital Altering Altering Doubling of
Nature of lower limit
guarantee trigger trigger performance
Maximum Maximum Maximum
Nature of upper limit Bonus level
settlement settlement settlement
ST: Short Term: less than 6 months Knock-out barrier: the product expires prematurely if the underlying
MT: Medium Term: between 6 and 18 months reaches this level.
LT: Long Term: more than 18 months Altering trigger: certain characteristics of the product are permanently
changed if the underlying reaches this level.
Pure
indexation
certificate
Sheet I 1
Investment products Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Pure indexation • Annual management fee: generally yes (deducted pro rata
temporis)
• Parity: varies by product
• Investment profile: bull strategy
A pure indexation product • Risk level: identical to underlying
is an investment • Investment horizon: from short to long term, depending
on strategy
instrument that closely • Valuation: transparent (equivalent to a
fraction of the underlying)
tracks the performance of • Knock-out feature no
• Trigger that alters the nature of the product: no
the underlying asset. • Option component: no
• Expiry date: with or without
The latter is generally • Legal form: certificate
an index, basket of
shares, interest rate Strategies/Profile
Pure indexation certificates offer their holders exposure to an underlying asset for a
or commodity. fraction of the underlying’s price. Investing in a pure indexation certificate enables
you to diversify your portfolio over a given asset at a lower cost, while gaining
exposure to the same movements in the asset’s market value as you would from a
direct investment. A pure indexation certificate also frees the holder from the risks
associated with investing in the underlying, such as insurance, storage and
deterioration in the case of precious metals, and the costs incurred with futures
holdings.
Profit
Loss
Underlying Certificate
Example Situation 1:
The price of the underlying asset ABC increases by 3%
Pure indexation product with • Underlying asset value: 103 euros.
• Product value: 10.29 euros
the underlying asset ABC: • Investor’s profit: 2.90%
• The initial value of which is • Deviation in gain/loss compared to underlying: -0.1%
100 euros.
• Parity is 1/10. Situation 2:
The price of the underlying asset ABC falls by 3%
• The initial value of the • Underlying asset value: 97 euros
product is 10 euros. • Product value: 9.68 euros
• Investor’s loss: 3.20%
• Deviation in gain/loss compared to underlying: -0.2%
Profit
Loss
Underlying Certificate
Capital
protected
product
Sheet I 2
Investment products Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Capital protection • Annual management fee: generally no
• Parity: varies by product
• Investment profile: bull and defensive strategy
• Risk level: lower than the underlying (partial
A capital-protected or total capital protection)
product enables the • Investment horizon: medium to long term, depending
on the product’s life
investor to gain full or • Valuation: relatively complex
• Knock-out feature: no
partial exposure to an • Trigger that alters the nature of the product: no
• Option component: yes
underlying asset, while • Expiry date: yes
• Legal form: certificate
enjoying a guarantee on
all or part of the invested
Strategies/Profile
capital in the event that Capital-protected products allow their holders to pursue defensive investment
strategies. They are excellent tools for gaining exposure to a market with low or even
the value of the asset zero risk. There are, however, a great many types of capital-protected products, each
with its own specific profile in terms of potential gains and losses. Most can be
falls. The guarantee subscribed to for a fixed price during a period determined by the issuer (subscription
might apply throughout period). Their subsequent value reflects movements in the underlying asset and in
interest rates (option component). That means valuing these products is often
the life of the product complicated. Careful study of their characteristics, especially the conditions to which
the capital guarantee is subject, is required before any investment.
or merely on expiry.
Profit
Protection
level
% participation
in upside
Example Situation 1:
The price of the underlying asset ABC increases by 30%
Capital-protected product with • Underlying asset value on expiry: 130 euros
the underlying asset ABC • Product value: 11.5 euros
• Investor’s profit: 15%
• Initial underlying asset • Deviation in gain/loss compared to underlying: -15%
value: 100 euros
• Protection level: 100 euros
Situation 2:
The price of the underlying asset ABC falls by 20%
• Participation: 50% • Underlying asset value on expiry: 80 euros
• Product value: 10 euros
• Parity: 1/10 • Investor’s loss: 0%
• Deviation in gain/loss compared to underlying: 20%
Profit
Protection
level
% participation
in upside
Sheet I 3
Investment products Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Yield enhancement • Annual management fee: no
• Parity: varies by product
• Investment profile: bull and defensive strategy
• Risk level: identical to underlying
Airbag products are • Investment horizon: short to medium term, depending
investment instruments on the product’s life
• Valuation: complex
that offer their holders • Knock-out feature: no
• Trigger that alters the nature of the product: yes
amplified exposure to an • Option component: yes
• Expiry date: yes
underlying asset, while • Legal form: certificate
giving them a capital
guarantee, provided that Strategies/Profile
Airbag products enable investors, under certain market conditions, to enhance the
the value of the upside performance of an underlying asset, while protecting part of their capital
(the « airbag effect ») if the underlying asset falls slightly in value. The degree of
underlying does not fall enhancement is subject to different levels within the performance of the underlying
asset. It is determined on expiry whether the underlying has passed these levels.
below a certain The more strongly the underlying performs, the greater the enhancement effect will
percentage fixed at the be. It is, however, subject to an upper limit.
time of issue.
The amplified exposure is Profit
Sheet I 4
Investment products Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Yield enhancement • Annual management fee: no
• Parity: varies by product
• Investment profile: neutral to slight bull strategy
• Risk level: lower than the underlying
This product offers • Investment horizon: short to medium term
investors a bonus on • Valuation: complex
• Knock-out feature: no
expiry, provided that its • Trigger that alters the nature of the product: yes
• Option component: yes
value has remained • Expiry date: yes
between a lower and an • Legal form: certificate
product thereafter
behaves like a pure
Upper limit
indexation certificate.
Passing the upper
limit does not cancel
the bonus.
Lower limit
Example Situation 1:
The price of the underlying asset ABC has risen 25% on expiry
Bonus product with the • Value of the underlying: 125 euros
• Settlement value: 125 euros
underlying asset ABC • Investor’s profit: 25%
• Deviation in gain/loss compared to underlying: 0%
• Expiry: 3 years
• Underlying asset value on Situation 2:
The price of the underlying asset ABC has fallen 11% on expiry. The underlying
issue: 100 euros asset price did not reach the lower limit (below 80 euros) before expiry.
• Underlying asset value: 89 euros
• Price of Bonus certificate: • Settlement value: 120 euros (Bonus value)
• Investor’s profit: 20%
100 euros • Deviation in gain/loss compared to underlying: 31%
• Bonus level: 120 euros
Situation 3:
• Lower limit: 80 euros The price of the underlying asset ABC has fallen 36% on expiry.
• Underlying asset value: 64 euros
• Parity: 1/1 • Settlement value: 64 euros
• Investor’s loss: 36%
The investor buys 1 certificate • Deviation in gain/loss compared to underlying: 0%
at 100 euros
Situation 4:
The price of the underlying asset ABC has risen 2% on expiry. The underlying asset
price fell below the lower limit (below 80 euros) before expiry.
• Underlying asset value: 102 euros
• Settlement value: 102 euros
• Investor’s profit: 2%
• Deviation in gain/loss compared to underlying: 0%
Profit
Upper limit
Lower limit
Sheet I 5
Investment products Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Yield enhancement • Annual management fee: no
• Parity: varies by product
• Investment profile: neutral to slight bull strategy
• Risk level: lower than the underlying
The Discount product • Investment horizon: short to medium term
enables investors to gain • Valuation: complex
• Knock-out feature: no
exposure to an underlying • Trigger that alters the nature of the product: no
• Option component: yes
asset while benefiting • Expiry date: yes
• Legal form: certificate
from a discount on the
purchase price.
Strategies/Profile
In exchange for this Discount products are suitable for investors who expect the underlying asset value to
remain flat or to rise by a small amount. If the underlying asset value should fall
immediate benefit, the (or rise), the initial discount on the purchase price will provide the investor with
a superior performance than that of the underlying. Other things being equal,
settlement of the product a discount product increases in value over time, since its value on expiry has to be
the same as the underlying (subject to the upper settlement limit). Three settlement
on expiry is subject to an scenarios are possible if the product is held to maturity (see example).
upper limit set at the
time of issue.
Profit
Maximum
settlement
Example Situation 1:
The price of the underlying asset ABC has risen 10% on expiry
Discount product with the • Underlying asset value: 11 euros
• Product’s settlement value: 11 euros
underlying asset ABC • Investor’s profit 15.79%
• Deviation in gain/loss compared to underlying: 5.79%
• Expiry: 1 year
• Original price of the Situation 2:
The price of the underlying asset ABC has risen 35% on expiry
underlying: 10 euros • Underlying asset value: 13.5 euros
• Product’s settlement value: 12 euros (maximum settlement price)
• Price of the Discount • Investor’s profit: 26.32%
• Deviation in gain/loss compared to underlying: -8.68%
product: 9.5 euros
• Maximum settlement price: Situation 3:
The price of the underlying asset ABC has fallen 15% on expiry
12 euros • Underlying asset value: 8.5 euros
• Product’s settlement value: 8.5 euros
• Parity: 1/1 • Investor’s loss: -10.53%
• Deviation in gain/loss compared to underlying: 4.47%
The investor buys 1 certificate
at 9.5 euros
Profit
Maximum
settlement
Sheet I 6
Investment products Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Yield enhancement • Annual management fee: no
• Parity: varies by product
• Investment profile: moderate bull strategy
• Risk level: identical to underlying
The Jet (or Sprint) • Investment horizon: medium term (average 1 year)
product gives investors • Valuation: complex
• Knock-out feature: no
the opportunity to double • Trigger that alters the nature of the product: no
• Option component: yes
the performance of an • Expiry date: yes
• Legal form: certificate
underlying asset if that
asset closes at a price
Strategies/Profile
between two limits (upper Jet products are suitable for investors who expect the underlying asset value to rise,
but not beyond the settlement limit fixed on issue. The profit potential is, in
and lower) fixed at the principle, substantially greater than that of the underlying, while the level of risk in
the event of a fall in value is the same. The additional profit potential offered by the
time of issue. This product compared to the underlying is built up progressively over time and is only
performance is subject to fully realised (if at all) on expiry. Three settlement scenarios are possible if the
product is held to maturity (see example). Before purchasing a Jet product at a price
an upper settlement limit, higher than that of the underlying, it is vital to calculate the theoretical break-even
point for the investment.
which is also fixed on
issue. If the value of the
Profit
asset falls and the
underlying closes below
Upper limit
the lower limit, the value
of the Jet product will be
equal to the closing price
of the underlying.
Lower limit
Loss
Certificate Underlying
Example Situation 1:
The price of the underlying asset ABC is 108 euros on expiry. The closing price is
Jet product with the between the two limits. Settlement is equal to: lower limit + 2 times (closing price -
lower limit)
underlying asset ABC • Underlying asset value: 108 euros
• Return on the underlying: 8%
• Expiry: 1 year • Product’s settlement value: 120 euros
• Initial price of the • Investor’s profit: 16.51%
• Deviation in gain/loss compared to underlying: 8.51%
underlying: 100 euros
Situation 2:
• Product price: 103 euros The price of the underlying asset ABC is 115 euros on expiry. The closing price is
above the upper limit. Settlement is equal to: lower limit + 2 times (upper limit -
• Lower limit: 96 euros lower limit)
• Upper limit: 110 euros • Underlying asset value: 115 euros
• Return on the underlying: 15%
• Maximum settlement limit: • Product’s settlement value: 124 euros (maximum settlement limit)
• Investor’s profit: 20.39%
124 euros • Deviation in gain/loss compared to underlying: 5.39%
Profit
Upper limit
Lower limit
Loss
Certificate Underlying
Exchange
Traded
Commodities
(ETC)
Sheet I 7
Investment products Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Pure indexation • Annual management fee: yes
• Parity: varies by product
• Investment profile: bull strategy
• Risk level: identical to underlying
An ETC is simply a pure • Investment horizon: from short to long term, depending
indexation certificate for on strategy
• Valuation: transparent (equivalent to a
which the underlying is a fraction of the underlying)
• Knock-out feature: no
commodity. Exchange • Trigger that alters the nature of the product: no
• Option component: no
Traded Commodities are • Expiry date: no
undated zero-coupon • Legal form: certificate
bonds backed by a
contract giving it Strategies/Profile
ETC certificates allow the investor to gain exposure to an underlying commodity for
exposure to the all or part of the price of the underlying. In other words, investing in an ETC enables
you to diversify your portfolio over a particular commodity at a lower cost, while
underlying commodity. gaining the same exposure to movements in the price of that commodity as you
would have obtained by investing directly. An ETC also frees the holder from the
ETCs directly track risks associated with investing in the underlying asset, such as insurance, storage
and deterioration in the physical commodity.
movements in the price
of the commodity itself
rather than in the share Profit
price of companies
specialising in the
commodity sector. They
allow investors to obtain
this exposure without 0
Please turn
Exchange
Traded
Commodities
(ETC)
(continued)
Example Situation 1:
The price of the underlying commodity ABC increases by 3%
ETC with the underlying • Underlying asset value: 103 euros
• Certificate value: 10.29 euros
commodity ABC: • Investor’s profit: 2.90%
• The initial value of which is
Situation 2:
100 euros. The price of the underlying commodity ABC falls by 3%
• Underlying asset value: 97 euros
• Parity is 1/10. • Certificate value: 9.69 euros
• Investor’s loss: 3.10%
• The initial value of the
certificate is 10 euros.
Profit
Loss
Underlying Certificate
Leverage
products
Leverage products
Plain vanilla warrant
Bear indexation Spread (combination of options)
Call Put
Spread Spread Plus
Bear indexation Plain vanilla warrant
(combination of options) (combination of options)
Investment strategy Bear Bull Bear Bull Bear Bull Bear
Opposite of the
Greater than the underlying Greater than the underlying
Risk level underlying
Investment horizon ST to LT ST to MT ST to MT
Leverage products
Digital with Leverage knock-out
double knock-out Call Put Call Put
Digital with Leverage knock-out
Leverage knock-out
double knock-out with financing level
Investment strategy Weak variation Bull Bear Bull Bear
Substantially greater
Far greater than the underlying
Risk level than the underlying
Investment horizon ST to MT ST to MT
ST: Short Term: less than 6 months Knock-out barrier: the product expires prematurely if the
MT: Medium Term: between 6 and 18 months underlying reaches this level.
LT: Long Term: more than 18 months Alterning trigger: certain characteristics of the product are
permanently changed if the underlying reaches this level
Bear
indexation
Sheet L 1
Leverage Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Bear indexation • Annual management fee: generally yes (deducted pro rata
temporis)
• Parity: varies by product
• Investment profile: bear strategy
Bear indexation products • Risk level: virtually identical to the opposite
offer investors the of the underlying
• Investment horizon: short to long term
opposite performance to • Valuation: transparent (difference between
reference level fixed on issue and
that of the underlying the underlying asset price,
adjusted for parity, excluding
asset. A safety threshold management fees)
• Knock-out feature: yes (upper limit)
(close or equal to a • Trigger that alters the nature of the product: no
reference level fixed at • Option component: negligible
• Expiry date: with or without
the time of issue) acts as • Legal form: certificate
Knock-out
Loss
Certificate Underlying
Example Situation 1:
The underlying asset price is 90 points
Bear indexation product with • Underlying asset value: 90 points
• Return on the underlying: -10%
the underlying asset ABC • Certificate value: 1.10 euro (reference level - underlying asset value, adjusted for
parity, i.e. (200 - 90) / 100) = 1.10
• Initial underlying asset price • Investor’s profit/loss: 10%
100 points
Situation 2:
• Certificate price: 1 euro The underlying asset price is 110 points
• Underlying asset value: 110 points
• Reference level: 200 points • Return on the underlying: 10%
• Product value: 0.90 euro (reference level - underlying asset value, adjusted for
• Safety threshold: 190 parity, i.e (200 - 110) / 100)
points (95% of reference • Investor’s profit/loss: -10%
level) Situation 3:
The underlying asset price is 195 points
• Parity: 1/100 • Underlying asset value: 195 points
• Return on the underlying: 95%
The investor buys 1 product • Product value: knocked out and settled
at 1 euro • Settlement value: 0.05 euro (reference level - underlying asset value, adjusted for
parity, i.e (200 - 195) / 100)
• Investor’s profit/loss: -95%
Profit
Entry level
Knock-out
Loss
Certificate Underlying
Plain vanilla
warrant
Sheet L 2
Leverage Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Plain vanilla warrant • Annual management fee: no
• Parity: varies by product
• Investment profile: bull (call warrant) or bear strategy
(put warrant)
A plain vanilla warrant • Risk level: greater than the underlying
gives the holder the right, • Investment horizon: short to medium term
• Valuation: complex (time value, volatility, etc.)
but not the obligation, to • Knock-out feature: no
• Trigger that alters the nature of the product: no
buy (in the case of a call • Option component: yes
• Expiry date: yes
warrant) or to sell (in the • Legal form: warrant
case of a put warrant) the
underlying asset at a Strategies/Profile
Plain vanilla warrants are suitable for investors who want to share in the rise (call
predetermined price warrant) or fall (put warrant) in the underlying asset value, for an initial investment
lower than the price of the underlying. In other words, warrants offer leverage with
(the strike price or respect to the underlying asset. Their profit potential is far greater than that of the
underlying. In theory, it is unlimited. Their risk profile is also much higher than that
exercise price) up to a of the underlying, but potential losses cannot exceed the amount invested. A clear
given date (expiry). The understanding of how these products function is vital before investing in them. The
price of a warrant moves in accordance with several criteria in addition to changes in
life of the warrant the underlying asset price, which it amplifies in a bull (call warrant) or bear market
(put warrant). The warrant price is sensitive to the time value: it falls in value as the
terminates on that date. warrant’s expiry date approaches. A warrant loses roughly two thirds of its value
during the final third of its life. The warrant price is also sensitive to the volatility of
The price the buyer pays the underlying asset. The higher the volatility, the higher the warrant price. If the
volatility diminishes, the value of the warrant also falls.
for this right is less than
Profit
that of the underlying
asset. Plain vanilla
warrants never expose
their holders to a risk of
0
loss greater than their
Strike price
initial investment.
Example Situation 1:
The price of the underlying asset ABC is 125 euros on expiry
Call warrant with the • Underlying asset value: 125 euros
• Return on the underlying: 25%
underlying asset ABC • Value of the warrant on expiry: 25 euros (underlying asset value - strike price)
• Investor’s profit/loss: 108%
• Initial underlying asset
price: 100 euros
Situation 2:
• Warrant price: 12 euros The price of the underlying asset ABC is 80 euros on expiry
• Underlying asset value: 80 euros
• Warrant strike price: • Return on the underlying: -20% (loss of 20 euros)
• Value of the warrant on expiry: 0 euro
100 euros • Investor’s profit/loss: -100% (loss of 12 euros)
The investor buys 1 warrant at
12 euros Profit
Strike price
Sheet L 3
Leverage Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Spread
• Annual management fee: no
(combination of options) • Parity: varies by product
• Investment profile: bull (call Spread) or bear strategy
These certificates, based on a (put Spread)
• Risk level: greater than the underlying
combination of options, offer • Investment horizon: short to medium term
investors exposure to • Valuation: relatively complex (time value,
volatility, etc.)
movements in an underlying • Knock-out feature: no
asset in a bull market (call • Trigger that alters the nature of the product: no
• Option component: yes
Spread) or bear market (put • Expiry date: yes
Spread). The investor’s return • Legal form: certificate
Example Situation 1:
The price of the underlying asset ABC is 75 euros on expiry. The lower limit has
Call Spread with the been passed.
• Underlying asset value: 75 euros
underlying asset ABC • Return on the underlying: -25%
• Value of call Spread on expiry: 0 euro
• Initial underlying asset • Investor’s profit/loss: -100% (-125 euros)
price: 100 euros
Situation 2:
• Price of call Spread: The price of the underlying asset ABC is 90 euros on expiry. The underlying is
between the two limits.
12.5 euros • Underlying asset value: 90 euros
• Return on the underlying: -10%
• Lower limit: 80 euros • Value of call Spread on expiry: 10 euros (difference between underlying and lower
• Upper limit: 100 euros limit)
• Investor’s profit/loss: -20% (100 euros - 125 euros)
• Maximum potential gain:
Situation 3:
20 euros The price of the underlying asset ABC is 120 euros on expiry. The underlying is
above the upper limit.
The investor buys 10 call • Underlying asset value: 120 euros
Spreads at 12.5 euros, giving • Return on the underlying: 20%
• Value of call Spread on expiry: 20 euros (difference between the two limits)
a total purchase cost of 125 • Investor’s profit/loss: 60% (200 euros - 125 euros)
euros
Profit
Upper
limits
Lower limits
Sheet L 4
Leverage Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Spread
• Annual management fee: no
(combination of options) • Parity: varies by product
• Investment profile: more dynamic portfolio management
• Risk level: higher than the underlying
Call Spread Plus and put • Investment horizon: short to medium term
Spread Plus certificates are • Valuation: relatively complex (time value, volatility,
etc.)
based on a combination of • Knock-out feature: no
options and offer investors • Trigger that alters nature of the product: yes
• Option component: yes
exposure to movements in an • Expiry date: yes
underlying asset in a bull • Legal form: certificate
Loss
two limits. Call Put Underlying
Combination of
options buy/sell
certificates
(call Spread
Plus and put Situation 1:
Spread Plus) The price of the underlying asset ABC is 90 euros on expiry
The underlying has reached the upper limit The underlying has not reached the upper
(continued) (150 euros) during the life of the product
• Underlying asset value on expiry:
limit (150 euros) during the life of the
product
90 euros • Underlying asset value on expiry:
• Return on the underlying: -10% 90 euros
• Value of the put Spread Plus on • Return on the underlying: -10%
Example expiry: 20 euros (the lower of: upper • Value of the put Spread Plus on
limit minus underlying asset price expiry: 20 euros (maximum gain)
Spread Plus Put with the (150 - 90) and the maximum gain) • Investor’s profit/loss: 25% (50 euros)
• Investor’s profit/loss: 25% (50 euros)
underlying asset ABC
• Initial underlying asset
price: 100 euros Situation 2:
The price of the underlying asset ABC is 140 euros on expiry
• Price of put Spread Plus: The underlying has reached the upper limit The underlying has not reached the upper
(150 euros) during the life of the product limit (150 euros) during the life of the
15 euros • Underlying asset value on expiry: product
• Lower limit: 130 euros 140 euros • Underlying asset value on expiry:
• Return on the underlying: 40% 140 euros
• Upper limit: 150 euros • Value of the put Spread Plus on • Return on the underlying: 40%
expiry: 10 euros (the lower of: upper • Value of the put Spread Plus on
• Maximum potential gain: limit minus underlying asset price expiry: 20 euros (maximum gain)
(150 - 140) and the maximum gain) • Investor’s profit/loss: 33% (50 euros)
20 euros • Investor’s profit/loss: -33% (-50 euros)
The investor buys 10 put
Spread Plus at 15 euros, Situation 3:
The price of the underlying asset ABC is 160 euros at maturity. The upper limit has
giving a total purchase cost been passed.
of 150 euros. • Underlying asset value on expiry: 160 euros
• Return on the underlying: 60%
• Value of the put Spread Plus on expiry: 0 euro (the lower of: upper limit minus
underlying asset price (150 - 160) and the maximum gain)
• Investor’s profit/loss: -100% (-150 euros)
Profit
Upper
limit
Price 1
Price 2
Lower limit
Loss
Call Put Underlying
Leverage
knock-out
Sheet L 5
Leverage Characteristics
• Continuous listing: yes
• Entry/exit fees: no
With barrier • Annual management fee: no
• Parity: varies by product
• Investment profile: bull/bear strategy
• Risk level: much higher than that of the
A knock-out product underlying (risk of total capital
loss)
tracks and substantially • Investment horizon: short term
amplifies the performance • Valuation: relatively simple (intrinsic value)
• Knock-out feature: yes, equal to the strike price
of an underlying asset in • Trigger that alters the nature of the product: no
• Option component: slight
both a bull and a bear • Expiry date: yes
• Legal form: certificate or warrant
market. However, if the
underlying reaches a Strategies/Profile
predetermined limit or Knock-out products are highly leveraged, which means they are only suitable for
active investors who want to take a bull (call) or bear position (put) in order to profit
knock-out barrier from movements in the underlying asset. It is relatively easy to value these products:
they are valued at their intrinsic value, namely the underlying asset price minus the
(downward for a call, strike price, divided by parity (for bull products) or the strike price minus the
underlying asset price, divided by parity (for bear products). These products are only
upward for a put), affected to a limited extent by the time value and volatility pattern of the underlying
asset. They require constant monitoring of the underlying asset price.
the product expires
prematurely. Its value
Profit
becomes zero.
The investor loses the
whole of the investment.
If, by contrast, the
product matures without
being knocked out, its
0
holder enjoys the same
rights as with a plain
Knock-out
vanilla warrant.
Loss Call Underlying Put
Example Situation 1:
The underlying asset value is 110 euros. The knock-out barrier has not been reached
Bull market product with a • Underlying asset value: 110 euros
• Return on the underlying: 4.76%
knock-out barrier and the • Value of the call warrant: 10.01 euros
• Investor’s profit/loss: 99.40% (499 euros, or 100 times (10.01 - 5.02)
underlying asset ABC
• Initial underlying asset Situation 2:
The underlying asset value is 103 euros. The knock-out barrier has not been reached
value: 105 euros • Underlying asset value: 103 euros
• Return on the underlying: -1.90%
• Knock-out: 100 euros • Value of the call warrant: 3.03 euros
• Investor’s profit/loss: -39.60% (-199 euros, or 100 times (3.03 - 5.02))
• Product value: 5.02 euros
• Parity: 1/1 Situation 3:
The underlying asset value is 99 euros. The knock-out barrier has been reached
The investor buys 100 call • Underlying asset value: 99 euros
• Return on the underlying: -5.70%
warrants at 5.02 euros, • Product value: knocked out and settled
• Settlement value: 0 euro
giving a total investment • Investor’s profit/loss: -100% (-502 euros, or 100 times (0 - 5.02))
of 502 euros
Profit
Knock-out
Sheet L 6
Leverage Characteristics
• Continuous listing: yes
• Entry/exit fees: no
With barrier • Annual management fee: no
• Parity: varies by product
• Investment profile: bull/bear strategy
• Risk level: much higher than that of the
A knock-out product with underlying (risk of total capital loss)
strike tracks and • Investment horizon: from short to medium term,
depending on strategy
substantially amplifies • Valuation: relatively simple (intrinsic value)
• Knock-out feature: yes, one that evolves over time
the performance of the • Strike price: yes, one that moves on a daily
basis
underlying asset in both a • Trigger that alters the nature of the product: no
• Option component: slight
bull and a bear market, • Expiry date: no
if the underlying is above • Legal form: certificate or warrant
Knock-out
Example Situation 1:
The underlying passes the barrier and the issuer unwinds at an average of 102.70
Leverage product with a euros.
• Product is knocked out
knock-out barrier and the • Settlement of the product: 0.27 euro
• Loss (0.27 - 2.01) = -1.74 euros or -86.57%
underlying asset ABC • The loss on a direct investment in the underlying would have been 14.44%
• Initial underlying asset
Situation 2:
value: 120 euros The underlying does not reach the knock-out barrier at any stage and is worth
147 euros
• Strike price (or financing • Position is sold when the underlying asset value is 147 euros
• Product value: 4.69 euros
level): 100 euros • Profit (4.69 - 2.01) = 2.68 euros or 133.33%
• Knock-out barrier: • The profit on a direct investment in the underlying would have been 22.50%
• Parity: 10/1
The investor buys 10 products
at 2.01 euros
Knock-out
Sheet L 7
Leverage Characteristics
• Continuous listing: yes
• Entry/exit fees: no
Digital
• Annual management fee: no
with double knock-out • Parity: varies by product
• Investment profile: movements in the underlying are
contained
Product with double • Risk level: much higher than that of the
knock-out barrier, the underlying (risk of total loss
of capital)
value of which on expiry • Investment horizon: short to medium term
• Valuation: complex
is fixed in advance. • Knock-out feature: yes, two
• Trigger that alters the nature of the product: no
The product expires • Option component: yes
• Expiry date: yes
prematurely if one of two • Legal form: certificate or warrant
predetermined levels is
reached during the Strategies/Profile
Products with a double knock-out barrier offer very strong leverage and are only
product’s life. suitable for active investors who want to take a position in order to profit from a
better return than that of the underlying asset, movements of which are contained
between two limits. The product has a fixed value on expiry, irrespective of where
the underlying asset value ends up between the two limits. If either of the knock-out
barriers containing the underlying asset value is reached during the life of the
product, the product expires prematurely with zero value.
Profit
Knock-out
barriers
Example Situation 1:
The underlying has risen 25% on expiry
Digital product with a double • Underlying asset value: 125 euros
• Product is knocked out
knock-out barrier and the • Settlement of the product: 0 euro
• Investor’s loss: 100%
underlying asset ABC
• Initial underlying asset Situation 2:
The underlying has not reached either knock-out barrier at any point and has fallen
value: 100 euros 15%
• Underlying asset value: 85 euros
• Lower knock-out barrier: • Settlement of the product: 1 euro
• Investor’s profit: 100%
80 euros
• Upper knock-out barrier:
120 euros Profit
at 0.50 euro