Derivatives: Derivatives are contracts which guarantee the right to buy or sell a product to a fixed price. The pricing is based on a market-dependent benchmark (base value or underlying). Base values can be securities (such as stocks, bonds), reference-magnitudes applied to the market (interest rates, indices), other trading-items (commodities, foreign exchange), but also non-economical figures. The trade with derivative financial instruments has become far more important since the 1980s.
Leverage products: Under the term leverage products derivatives are summarized which enable a leveraged participation on the rate-developments of a base value. This means, that (at an example of a chart development of +10 %) the investor – if he invests on the right derivative – not only makes 10 % profit, but 100 % on his invested capital.
The most important leverage products are:
Turbos, Bulls, Bears, WAVEs, Knock-Out-Certificates
Behind all these terms, leverage products are ensconced, which can be out-stopped at an achievement of a particular market-rate. In practice, this means that either a small residual value is paid off (if the KO-mark is not identical to the base value) or, that knockout-certificates or knockout-warrants are immediately closed out without value.
Some emitters match knockout-products to certificates, others again denote them as warrants. Basically, these products are a question of futures which have been provided with a knockout-threshold. Therefore, parameters – such as influences on the volatility which are price-relevant for warrants – are not operative.
The cause of the lever: Turbo-certificates only cost a fraction of comparable index-certificates. A normal index-certificate at the DOW JONES, with an exchange ratio of 100:1 costs about 80USD at a DOW JONES mark of 8000. A turbo-certificate at the same exchange ratio – where the knockout-threshold lies at 6000, exhibits an inner value of 20 USD. (Current DOW JONES value 8000 – knockout-threshold 6000 = exchange ratio.)
Because of the interest’s benefit through the minor capital expenditure, the certificate’s real value though lies above the inner value, dependent on the certificate’s duration. As soon as the DOW JONES changes one unit, the certificate moves according to the exchange ratio with one to one with the index. If the DOW JONES increases its mark from 8000 to 8600, the certificate’s inner value increases from 20 to 26 USD, respectively 30 %.
Watch out before the knockout: Naturally, this turbo-effect can also impinge in the other direction. But there is another danger: As soon as the index reaches the knockout-threshold stated in the sales brochure, the certificates deteriorate immediately. Therefore it is advisable to trade these “hot irons” with own stops to avoid the danger of closing out without value.
With these certificates there is no feared reserve liability – which is usually linked to futures – because of the knockout-threshold.
Many emitters also offer turbo-certificates with a short future structure, which gives joy to the investor exactly then, when the base value is falling. The structure of these turbos is mirror inverted to the turbos which profit from rising base value rates. Therefore the knockout-threshold lies above the current value of the base value. Depending on the emitter, the knockout-threshold is also known as stop-loss mark.
The selection of base values is nearly as comprehensive as the capabilities of the knockout-products. No matter if in open end forms or in forms limited in time; with knockout-products capital can be backed in all directions on share-, index-, currency-, interest-, commodity-, noble metal quotations.
Knockout-products: It pays to choose knockouts (also WAVEs, turbos, or the like – depending on the emitter) for those who want to exploit price movements with a larger success, because with these products you enhance the chances to achieve profits with market vacillations. Knockout-products have conquered the market for leveraged investments already just after their approach. More than 50% of all leverage product activities are registered in knockouts.
Not without reason: Knockout-products are more transparent – seen from the aspect of pricing, easier to understand and cheaper than other leverage products. Drawbacks like margin-payments, high influences on volatility, unlimited risk or high transaction-costs do not exist.
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