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Warrants &

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

Understanding warrants and certificates 3

What is a warrant? 3

What is a certificate? 3

What are their advantages? 3

What underlying assets are available? 4

What is the warrant and certificate segment? 4

How do you assess their risk level? 5

Segmentation 6

Code 8

Product denomination 9

Product types (table) 10

- Reference to Product Sheet Appendix 10

How do you choose them? 12

How do you buy them? 14

Seven golden rules for warrant


and certificate investors 15

Appendix 16

How do warrants differ from options? 16

How do certificates differ from ETFs? 17

Glossary 18

Contacts 20
2

Season your strategy


The benefits of warrants and certificates are well
established by now. Listed on the stock exchange and
tradable like shares, they offer a straightforward and
effective way to turn your market expectations into
investments or to hedge your portfolio. In return for a
modest outlay, they provide investors with significant
profit potential, while the maximum loss is known in
advance.

The attractiveness of these instruments is clear from


the success they enjoy among the financial
community. Following their launch on the French
market in 1989, the number of available products
rose to 3,700 by the end of 2000. Five years later,
that figure had almost doubled to 6,358 warrants and
certificates from around ten issuers. More than
20 institutions are now active in this market, which
currently accounts for an annual transaction volume in
excess of 30 billion euros and offers a choice of over
12,000 products.

NYSE EuronextSM decided in November 2007 to


segment its warrants and certificates. From now on,
they will be categorised according to an objective
assessment of the potential profit and loss they carry
for their holders, rather than by their legal
characteristics, as was previously the case.

This guide introduces investors to the new terminology


and provides a complete overview of the products
currently available on Euronext®’s markets. It will help
you to select the instruments that are best suited to
your risk profile and which have the potential, within
reasonable limits, to boost the performance of your
portfolio.
3

Understanding warrants and certificates

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

What are their advantages?


(continued)

• Easier access to all asset classes


Warrants and certificates enable you to invest in
asset classes that tend to be difficult for private
investors to access, such as commodities, foreign
exchange and baskets of shares from a particular
sector. They also provide exposure to foreign
equities and indices on the same pricing terms as
apply to domestic equities.

• 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

How do you assess their risk level?


The level of risk associated with each certificate or
warrant varies widely. Some products are simply
intended to track the performance of the underlying
asset as closely as possible, giving them the same risk
level. Others, by contrast, strongly amplify any
changes in the underlying. The way their prices move
also depends on factors other than simply the
performance of the underlying asset. As a result, their
risk level is substantially greater than that of the
underlying.
NYSE Euronext resegmented its listed warrants and
certificates in November 2007 to help investors
assess the risk level of these products more
accurately. Further segments are likely to be created Segmentation by exposure and
in the future as new types of product are brought to
market.
product behaviour

When these products first appeared, the legal


distinction between warrants and certificates - with
the former deemed less risky than the latter - was
enough to give investors a relatively reliable way of
assessing their exposure. However, the proliferation of
products on the market and growing innovation have
blurred the traditional boundaries between warrants
and certificates, to the extent that this criterion is no
longer relevant. This prompted NYSE Euronext to
segment warrants and certificates according to an
objective assessment of the potential gains and losses
they represent for their investors.
6

Level I assessing the risk exposure

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.

This segment is made up of products for which


investors can answer « no » to the following question:
« Could I possibly lose my entire investment? » Unless
the underlying asset loses all its value, investors
cannot lose more than they would if they had invested
in the underlying directly.

level II assessing the behaviour of the product

The second level of segmentation groups products that behave in a similar


way. Investment products consist of three product families, while leverage
products have five.

Investment product family:


• « Pure indexation » products precisely track the
performance of the underlying asset.

• Upon maturity, « Yield enhancement » products


are valued at least the underlying asset price
while improving on its performance, in certain
market conditions or between certain
predetermined limits.

• « Capital protection » products reproduce some


or all of the upside performance of the
underlying asset, while guaranteeing some or all
of the initial capital if the value of the
underlying falls.
7

assessing the risk exposure Level I

Leverage products:
Investors can lose their entire investment. The
product is designed either to amplify or to invert
the performance of the underlying asset.

This segment is made up of products for which


investors can answer « yes » to the following question:
« Could I possibly lose my entire investment? » Even
if the underlying asset itself does not lose all its
value, investors risk losing more than they would if
they had invested in the underlying directly.

assessing the behaviour of the product Level II

Leverage product family:


• « Plain vanilla warrants » are basic call or put
option products.
• « Bear indexation » products generate the
opposite performance to the underlying asset.
They mature prematurely if a predetermined
level is reached during the product’s life.
• « Spread » products combine the purchase and
sale of options.
• « Digital knock-out » products are valued on
expiry at a sum determined in advance, provided
the underlying asset stays between two
predetermined levels. The product matures
prematurely if either of these two levels is
reached during its life.
• « Leverage knock-out » products offer leveraged
tracking of the performance of the underlying
asset if the latter is above (call) or below (put) a
predetermined level. They mature prematurely if
that level is reached during the product’s life.
8

Code to indicate a product’s risk


level and composition
Investors now have a straightforward code they can
use to rapidly assess the level of risk associated with
products they are thinking of buying. The code also
informs them about the product characteristics and
whether there is a « knock-out » mechanism that
could potentially trigger the total loss of their
investment.
䡵 Investment product: risk equivalent to investing
The code is included in each product sheet and in the
directly in the underlying asset.
bookmark attached to the brochure.

䡵 Leverage product: risk greater than investing


directly in the underlying asset.

䡵 Knock-out feature: the investor could suddenly


lose the entire investment. These products are
structured around « knock-out barriers », which
means that investors cannot lose more than their
initial outlay.

䡵 Option component: the investor needs to use a


valuation tool for the product. These products are
based on options and their valuation depends on
factors like time and volatility rather than the
simple evolution of the underlying assets.
9

Product denomination to identify the characteristics of each product

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.

Example of product denomination:

A B C 1 1 0 C 0 91 2 X

There are five parts to the name:


- A code of up to five characters for the underlying asset: ‘ABC’ means the ABC share
- The strike price rounded to a maximum of five digits
- The product type in up to three characters: ‘C’ means ‘call’
- The maturity date in four digits: ‘0912’ or September 2012
- A single-character code representing the issuer: “X”
10

Product types
Investment products

Pure indexation Capital protection Yield enhancement

Investment strategy Bull Bull and defensive Bull and defensive

Risk level Same as underlying Less than underlying Same as underlying

Investment horizon ST to LT MT to LT according to product type LT

Valuation Simple Complex Complex

Option component No Yes Yes

Expiry date With or without Yes Yes

Legal form Certificate Certificate Certificate

Upside cap No Variable Variable

Knock-out feature No No No
Trigger that alters the nature of the
No No Variable
product
Lower limit No Yes Variable

Upper limit No No Variable

Nature of lower limit Capital guarantee Variable

Nature of upper limit Variable

Profit
Profit

Loss
Underlying Certificate Loss
Graph: warrant/certificate simulation Underlying Bonus Discount Jet Airbag

(at expiry)
Profit

Protection
level

% participation
in upside

Loss Certificate Underlying

ST: Short Term: less than 6 months


MT: Medium Term: Between 6 and 18 months
LT: Long Term: more than 18 months
11

Leverage products
Plain vanilla warrant Spread (combination of options)
Bear indexation Digital with double knock-out Leverage knock-out
Call Put Call Put

Bear Bull Bear Bull Bear Contained variation Bull Bear

Significantly greater
Opposite of the underlying Greater than the underlying Greater than the underlying Far greater than the underlying
than the underlying

Risk of total loss of capital

ST to LT ST to MT ST to MT ST to MT ST to MT

Simple Complex Complex Complex Complex

Negligible Yes Yes Yes Negligible

Variable Yes Yes Yes Variable

Certificate Warrant Certificate Warrant Certificate or Warrant

Limited to Limited to
Limited to the underlying
No the underlying Yes Yes No the underlying
asset value
asset value asset value

Yes (upper limit) No No Yes, 2 Yes

No No Variable No No

No Yes No Yes Yes Yes Variable

Yes No Yes Yes Yes Variable Yes

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

Loss Underlying Certificate

Loss Underlying Call Put

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

How do you choose them?


Choosing between the various existing products depends on the investor’s profile, risk preference, market vision
and level of conviction. Investors with a clear market vision and substantial risk tolerance will opt for leverage
products.
Those with a less pronounced view of where markets are going and who do not wish to take too high a risk will
prefer investment products. Segmentation will help investors to translate their risk appetite and market
expectations into specific products.

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.

The investor expects that any increase in the


underlying asset value will be limited in scale.
Yield enhancement: the risk is identical to that of
a pure indexation product. The performance of the
underlying asset may be amplified and/or subject
to an upper limit if the underlying rises beyond a
certain value.
13

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

How do you buy them?


Warrants and certificates are traded on Euronext’s regulated market in the same way as shares. You do not have
to open a specific securities account: buy and sell orders can be placed via any financial intermediary (bank,
stockbroker, online brokerage, etc.). Here is a summary of the key characteristics of warrants and certificates.

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.

Last day of trading


The last day of trading for a warrant or certificate is
not always the expiry date. Before investing, you
should check with your financial intermediary, the
issuer or NYSE Euronext the product’s last trading
date.
15

Seven golden rules for warrant


and certificate investors
1- Determine your profile 5- Optimise your trading
Before making any investment decisions or choosing a Warrants and certificates require regular monitoring.
product, it is vital to identify your precise profile as an Taking too many positions at once over several
investor. How much money are you prepared to risk in products can reduce the quality with which you
this market? How much time do you have (per day, manage your investments. You can diversify across
week or month) and are you prepared to devote to products with different risk profiles, provided that you
managing your portfolio? What goals do you have in can still devote the necessary time to tracking your
terms of returns? How much are you willing to invest to positions.
achieve those goals? The answers you give to these
questions will help you choose products with more or 6- Choose the right maturity
less risk exposure, and more or less volatility. If a product has an expiry date, the closer it
approaches to that date, the riskier it becomes and
2- Have clear views the quicker it will have to be sold. That means it is
Before making any investment decision, it is less likely to realise a
imperative that you carry return. You need to
out a preliminary analysis
choose an expiry date
of the market in general
that matches your
and of the underlying asset
investment goals,
in particular. You have to
while maintaining a
form a clear view of how
certain safety margin.
the underlying is likely to
Ideally, the life of the
move. Your investment
selected products
strategy and choice of
should be at least
product will be based on
four times longer than
the rise or fall in value that
the scenario you have
you anticipate.
in mind.

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.

4- Diversify your portfolio


Holdings of certificates and warrants should never
account for too substantial a proportion of an
investor’s portfolio. You should treat them as products
that enable you to diversify your assets in terms of
risk (leverage) and/or underlying assets.
16

Appendix

How do warrants differ from


options?
Warrants, like options, depend on an underlying asset
such as a share, bond or index, movements in which,
both upward and downward, they generally amplify.
Other features they have in common are an expiry
date and a strike price. All the same, warrants differ
from options in several respects:

• 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.

• Diversity of underlying assets


Warrants offer a wide range of underlying assets.
Options are mainly issued on shares, indices,
commodities and interest rates.

• 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

How do certificates differ from


ETFs?
ETFs (Exchange Traded Funds), or Trackers®, are
funds listed on the stock market, the purpose of
which is to faithfully reproduce movements in a
reference index. Like pure indexation certificates,
which have the same purpose, they are traded like
shares and have a dedicated segment within
Euronext’s regulated markets (NextTrack®). However,
they differ from certificates in several respects.

• 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.

• Diversity of underlying assets


Certificates offer a wide range of underlying
assets. ETFs, which are subject to stricter
investment rules, focus on reproducing indices,
which are themselves invested over a broad group
of underlying assets.

• 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.

At the money Leverage


A product is ‘at the money’ when its strike price is near or Ratio of the warrant or certificate price to that of the
equal to the market price of the underlying asset. underlying. Movements in a warrant or certificate are often
proportionally greater than those in the underlying.
Break-even point
The level the underlying must have reached on the product’s Out of the money
exercise date in order for the investor to recover the initial A call product is ‘out of the money’ when the price of the
outlay. underlying is lower than the strike. A put product is out of
the money when the price of the underlying is higher than
Call warrant the strike.
A call warrant gives the right, but not the obligation, to buy
an underlying asset at a price fixed at issue for a specified Parity
period. The number of products you have to acquire to exercise your
right with regard to the underlying asset. A parity of 10 on a
Certificate call product over a share, for instance, means that you would
A certificate is a listed security issued by a financial have to exercise ten products to purchase a share at the
institution, accessible from a standard securities account, strike price.
with settlement terms on expiry that are known at the time of
issue. Plain vanilla warrant
Structured investment instrument with a continuous market
Delta listing that gives the right, but not the obligation, to buy or
Coefficient used to calculate the number of units by which sell a chosen asset at a price fixed at issue during a
the product will change when the underlying asset changes predetermined period.
by one unit. A product with a delta of 100%, for instance,
will reproduce 100% of the change in the value of the Premium
underlying asset. Percentage by which the value of the underlying must move
in order to reach break-even.
Elasticity
Parameter allowing a product’s sensitivity to changes in the Put warrant
price of the underlying to be expressed as a percentage. A put warrant gives the right, but not the obligation, to sell
Elasticity = (price of underlying / (price of product x parity) x an underlying asset at a price fixed at issue for a specified
delta. period.

European warrant Security


A warrant is referred to as « European » when it can only be Tradable financial instrument issued by a company or a
exercised on its expiry date. public institution, which may be listed and traded on an
exchange (e.g. shares, bonds, warrants and certificates).
Exercise
Exercising a warrant or certificate means using the right Theta
attached to it. Coefficient measuring a product’s sensitivity to the passage
of time.
Exercise price (or strike)
The price at which the holder may buy or sell the underlying. Underlying
It is fixed at the moment the product is issued. Financial instrument (share, bond, index, exchange rate,
interest rate, commodity, etc.) to which the warrant or
Expiry date (or maturity) certificate relates.
Date on which the right to buy or sell an instrument expires.
This date represents the limit of the warrant or certificate’s Unit of trade
life. Minimum quantity of products that can be traded.

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

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20

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© February 2008, NYSE Euronext. All rights reserved.


Warrants &
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
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

Same as Less than Same as Same as Less than Same as


Risk level
underlying underlying underlying underlying underlying underlying

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

Valuation Simple Complex Complex Complex Complex Complex


Option component No Yes Yes Yes Yes Yes
Expiry date With or without Yes Yes Yes Yes Yes
Legal form Certificate Certificate Certificate Certificate Certificate Certificate

Upside limit No Variable Variable No Yes Yes

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

Please turn over


Pure
indexation
certificate
(continued)

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

Loss Certificate Underlying


Please turn over
Capital
protected
product
(continued)

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

Loss Certificate Underlying


Airbag
certificate

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

subject to an upper limit


on any increase in the
underlying asset, the level
of which is also fixed
on issue.

Loss Certificate Underlying

Please turn over


Airbag
certificate
(continued)

Example Situation 1: Situation 4:


The price of the underlying asset ABC The price of the underlying asset ABC
Airbag product with the has risen 5% on expiry has fallen 15% on expiry
underlying asset ABC • Underlying asset value: 105 euros • Underlying asset value: 85 euros
• Product value: 10.5 euros • Product value: 10 euros (airbag effect)
• Expiry: 3 years • Investor’s profit: 4.9% • Investor’s loss: 0.01%
• Performance enhancement at • Deviation in gain/loss compared to • Deviation in gain/loss compared to
underlying: -0.1% underlying: 14.99%
each level:
➱ 100% if the underlying Situation 2: Situation 5:
The price of the underlying asset ABC The price of the underlying asset ABC
increases in value by 0-10% has risen 15% on expiry has fallen 40% on expiry. That means
➱ 150% if the underlying • Underlying asset value: 115 euros the product has fallen 15% below the
• Product value: 11.75 euros (100% airbag level.
increases in value by 10-20% of 1 euro for the first 10% and 150% • Underlying asset value: 60 euros
➱ 200% if the underlying of 0.5 euro for the next 5% - i.e. • Product value: 8 euros
0.75 euro) • Investor’s loss: 20%
increases in value by 20-25% • Investor’s profit: 17.4% • Deviation in gain/loss compared to
➱ Any value increase beyond • Deviation in gain/loss compared to underlying: 20%
underlying: 2.4%
25% is subject to an upper
limit of 13.5 euros (100 + Situation 3:
The price of the underlying asset ABC
100% x (110 - 100) + has risen 40% on expiry
150% x (120 - 110) + • Underlying asset value: 140 euros
• Product value: 13.5 euros (maximum
200% x (125 -120)) / 10 settlement)
• Airbag effect: 80% of the • Investor’s profit: 34.85%
• Deviation in gain/loss compared to
underlying asset value on issue underlying: -5.15%
• Parity: 1/10
Profit
• Underlying asset value on
issue: 100 euros
• Product value on issue:
10.01 euros
• The investor buys 10 products
at 10.01 euros

Loss Certificate Underlying


Bonus
certificate

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

upper limit fixed on


Strategies/Profile
issue. If either of these Investors profit from the entirety of any increase in the underlying asset value, while
limits is passed, protecting their capital to the level fixed by the lower barrier. They will only incur a
loss if that barrier is reached and if the underlying asset price turns out to be less
settlement on expiry will than the price of the certificate.
Bonuses are investment products with the potential for enhanced performance,
be equal to the closing without exposure to a greater risk than that associated with investing in the
underlying. There is no upside limit, which means investors can take full advantage
price of the underlying. of a rise in value, while guaranteeing a minimum return provided that the lower limit
If the lower limit is is not reached. Above the bonus level, the product’s performance will be the same as
that of the underlying asset.
passed, the bonus is
cancelled and the Profit

product thereafter
behaves like a pure
Upper limit
indexation certificate.
Passing the upper
limit does not cancel
the bonus.

Lower limit

Loss Price 1 Price 2 and underlying asset priced

Please turn over


Bonus
certificate
(continued)

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

Loss Price 1 Price 2 and underlying asset priced


Discount
certificate

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

Loss Underlying Certificate

Please turn over


Discount
certificate
(continued)

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

Loss Underlying Certificate


Jet/Sprint
certificate

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

Please turn over


Jet/Sprint
certificate
(continued)

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%

• Parity: 1/1 Situation 3:


The investor buys 1 product at The price of the underlying asset ABC is 95 euros on expiry. The closing price is less
than the lower limit. Settlement is equal to the closing price of the underlying.
103 euros • Underlying asset value: 95 euros
• Return on the underlying: -5%
• Product’s settlement value: 95 euros (closing price of the underlying)
• Investor’s loss: -7.77%
• Deviation in gain/loss compared to underlying: - 2.77%

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

having to manage future


market investments or to
take physical delivery of
the underlying.
Loss
Underlying Certificate

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

Risk of total loss of capital

Investment horizon ST to LT ST to MT ST to MT

Valuation Simple Complex Complex


Option component Negligible Yes Yes
Expiry date Variable Yes Yes
Legal form Certificat Warrant Certificat
Limited to Limited to
Upside limit the underlying No the underlying Yes
asset value asset value
Knock-out feature Yes (upper limit) No No
Trigger that alters the nature
No No No Yes
of the product
Lower limit No Yes No Yes
Upper limit Yes No Yes Yes
Altering
Nature of lower limit Strike Strike bought Strike sold Strike sold
trigger
Knocks out Altering
Nature of upper limit Strike Strike sold Strike bought Strike sold
product trigger
Strike = exercise price
Leverage
products
(continued)

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

Risk of total loss of capital

Investment horizon ST to MT ST to MT

Valuation Complex Simple Transparent


Option component Yes Negligible
Expiry date Yes Yes No
Legal form Warrant Certificate or Warrant
Limited to Limited to
Upside limit Yes No the underlying No the underlying
asset value asset value
Knock-out feature Yes, 2 Yes
Trigger that alters the nature
No No
of the product
Lower limit Yes Yes No Yes Yes
Upper limit Yes No Yes Yes Yes

Nature of lower limit Knock-out Knock-out Strike Knock-out

Nature of upper limit Knock-out Knock-out Knock-out Strike

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

a cut-off to limit the risk


Strategies/Profile
of loss if the underlying Bear indexation products are suitable for investors who expect the underlying asset
asset price should rise. value to fall and who want to limit their risk to the amount invested. They generate
the opposite performance to the underlying, some products are adjusted to exchange
This means the maximum rate movements. Their value equals the difference between a reference level (fixed
on issue) and the underlying asset price.
loss that the investor can
Profit
incur is limited to the
amount invested, unlike a
Entry level
traditional short sale,
where the maximum loss
is theoretically unlimited.
0

Knock-out

Loss
Certificate Underlying

Please turn over


Bear
indexation
(continued)

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.

Loss Underlying Call Put

Please turn over


Plain vanilla
warrant
(continued)

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

Loss Underlying Call Put


Combination
of options
buy/sell (call
Spread and
put Spread)

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

on expiry depends on the


underlying asset value and Strategies/Profile
whether or not it falls between Call Spread and put Spread certificates are comparable in economic terms with
plain vanilla warrants. If you buy a call Spread certificate, for instance, you are
an upper and a lower limit fixed simultaneously purchasing a call warrant with the lower limit as its strike price and
on issue. If the underlying selling a call warrant with the upper limit as its strike price and the same expiry
date. The exposure to the time value generated by buying one call is partially offset
closes between the two limits, by selling the other. Spread certificates offer cheaper and less volatile hedging than
the value of the certificate will would be obtained by purchasing a plain vanilla warrant.

be equal to the underlying asset


value minus the lower limit
(call Spread) or the upper limit Profit

minus the underlying asset Upper


value (put Spread). If the limits

underlying closes below the


lower limit (call Spread) or
above the upper limit (put
Spread), the value of the
certificate on expiry is zero. The 0

maximum capital gain is known


at the time of issue (maximum
Lower limits
settlement). The risk is limited
to the amount invested. Loss Call Underlying Put

Please turn over


Combination
of options
buy/sell (call
Spread and
put Spread)
(continued)

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

Loss Call Underlying Put


Combination of
options buy/sell
certificates
(call Spread
Plus and put
Spread Plus)

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

market (call Spread Plus) or


bear market (put Spread Strategies/Profile
Call Spread Plus and put Spread Plus products offer investors a double opportunity
Plus). The investor’s return to obtain the maximum settlement fixed on issue. Unlike the basic call Spread and
put Spread, they are guaranteed to receive the maximum settlement if the final
on expiry depends on the underlying asset value is higher than the upper limit for a call Spread Plus (or below
behaviour of the underlying the lower limit for a put Spread Plus), but also if the final asset value falls between
these two limits, provided that the underlying asset value did not pass the lower (call
during the life of the pro- Spread Plus) or upper limit (put Spread Plus) during the life of the product.
duct. If, in the case of a bull Investors choose a call Spread Plus when they expect a slight increase, stability or
even a slight fall (but not below the lower limit) in the underlying asset value. In the
product, the underlying case of a put Spread Plus, the investor expects a fall, stability or even a slight
passes the lower limit (call increase (but not beyond the upper limit) in the underlying asset value.

Spread Plus) or in the case


of a bear product, the upper Profit
limit (put Spread Plus) fixed
Upper
on issue, the product will limit
subsequently behave exactly
like a call Spread or put
Spread certificate respectively Price 1
Price 2
(see Sheet L 3). In all other
cases, the investor will
receive on expiry the maximum
settlement amount, equal to
the difference between the Lower limit

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

Please turn over


Leverage
knock-out
(continued)

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

Loss Call Underlying Put


Leverage
knock-out
with strike

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

(call) or below (put) a


Strategies/Profile
predetermined level. 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
The product expires from movements in the underlying asset. It is relatively easy to value these products,
prematurely if that provided that the knock-out barrier has not been reached. They are valued at their
intrinsic value, namely the underlying asset price minus the strike price, divided by
predetermined level parity (for bull products) or the strike price minus the underlying asset price, divided
by parity (for the bear products). If the knock-out barrier is reached, the product
is reached. expires prematurely. Its value is then zero. The investor can, however, receive a
compensation payment (generally small), calculated according to each issuer’s
prospectus terms.
Profit

Knock-out

Loss Put Call Underlying


Please turn over
Leverage
knock-out
with strike
(continued)

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%

104 euros Profit

• Parity: 10/1
The investor buys 10 products
at 2.01 euros

Knock-out

Loss Put Call Underlying


Digital
with double
knock-out
barrier

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

Loss Underlying Certificate

Please turn over


Digital with
double
knock-out
barrier
(continued)

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

• Settlement value: 1 euro


Knock-out
The investor buys 10 products barriers

at 0.50 euro

Loss Underlying Certificate

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