warrants and certificates
TRANSCRIPT
Warrants &CertificatesGuideSeason your strategy
www.nyseeuronext.com2008 © 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
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.
Season your strategy
3
What is a warrant?A warrant is a financial instrument that can be traded
on the stock exchange. It gives the holder the right,
but not the obligation, to buy (in the case of a call
warrant) or to sell (in the case of a put warrant) an
underlying asset at a predetermined price (the strike
price or exercise price) up to a given date (expiry).
The life of the warrant terminates on that date. The
price the buyer pays for this right is less than that of
the underlying asset.
What is a certificate?Certificates are listed securities with the legal
character of a complex debt instrument. They are
issued by banks and have settlement terms on expiry
that are known and guaranteed at the time of issue.
There are several types of product, each with a
specific investment and risk profile.
What are their advantages?As exchange-listed products, warrants and certificates
offer a variety of benefits:
• SimplicityWarrants and certificates can be traded on the
stock market, just like shares. Investors can put
on or close positions whenever the market is open,
by buying or selling the instruments.
• LiquidityThe liquidity of warrants and certificates is
ensured by their issuer, who undertakes to provide
a buy price and a sell price at all times.
• TransparencyDetailed information about the nature of each
product is available from the issuer’s website and
from that of NYSE Euronext.
• SecurityThe issue of warrants and certificates is controlled
and approved by the financial market regulator of
any EU member state. They are traded on
NextWarrants®, the dedicated product segment of
Euronext, the European subsidiary of
NYSE Euronext.
Warrants and certificates offer additional benefits,
specific to their structure:
• LeverageThe price you pay for the warrant or certificate is
often considerably lower than that of the
underlying asset. This enables investors to take
advantage of movements in the price of the
underlying securities for a relatively modest outlay.
The leverage or gearing is represented by the
number of warrants or certificates the investor can
purchase for a sum equivalent to the price of the
underlying asset. The effect is measured by
dividing the underlying asset price by the warrant
or certificate price (adjusted for parity).
• Risk limited to original investmentWarrant and certificate investors always know the
maximum loss they can incur, which is not the
case with futures contracts, options or Deferred
Settlement Service transactions. In the worst case,
they cannot lose more than the amount of their
initial investment - the warrant or certificate price.
Understanding warrants and certificates
4
What are their advantages?(continued)
• Easier access to all asset classesWarrants 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.
• DiversificationBecause 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
traditional asset classes like shares and bonds, at
lower cost.
• HedgingThe price of certain warrants and certificates
moves in the opposite direction to that of the
underlying assets. This allows investors to hedge
their portfolio against the risk of a fall in the
market or to take advantage of a decline in the
price of the underlying securities.
• Anticipating trendsWarrants and certificates, which can have a
maturity of several years, enable investors to
benefit from the anticipated performance of an
underlying asset in return for a modest
investment. Rather than funding the purchase of
the underlying immediately, they can wait for the
ideal moment at which to buy the asset at the
predetermined price. Conversely, some warrants
and certificates (puts) allow investors to defer
selling assets in their portfolio, while protecting
them against the risk of a fall in price.
What underlying assets are available?Warrants and certificates provide access to a steadily
growing number of underlying assets: currently over
350. These break down into six major asset classes:
- Domestic and foreign equities
- Baskets of domestic, foreign and themedequities
- National, international and sector indices
- Foreign exchange
- Commodities
- Interest rates
What is the warrant and certificatesegment?NYSE Euronext created this segment in 2002 to bring
together all the warrants and certificates listed on its
different markets, and to raise the visibility of these
products in order to facilitate their access.
The number of listed products varies as new ones are
issued, existing products mature and replacements
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 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
in the future as new types of product are brought to
market.
Segmentation by exposure andproduct 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.
How do you assess their risk level?
6
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.
assessing the risk exposure
The first level of segmentation distinguishes between « investment products » and « leverage products ».
Level I
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.
assessing the behaviour of the product
The second level of segmentation groups products that behave in a similarway. Investment products consist of three product families, while leverageproducts have five.
level II
7
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 risk exposure Level I
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.
assessing the behaviour of the product Level II
8
Code to indicate a product’s risklevel and compositionInvestors 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.
The code is included in each product sheet and in the
bookmark attached to the brochure.
� Investment product: risk equivalent to investing
directly in the underlying asset.
� Leverage product: risk greater than investing
directly in the underlying asset.
� 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.
� 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:
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”
A B C 1 1 0 C X2190
10
Yield enhancementCapital protectionPure indexation
Bull
Same as underlying
ST to LT
Simple
No
With or without
Certificate
No
No
No
No
No
No No
No Variable
Variable
Variable
Variable
Variable
Yes
No
Capital guarantee
Variable Variable
Complex
Yes
Yes
Certificate
Complex
Yes
Yes
Certificate
Bull and defensive
Less than underlying
MT to LT according to product type
Bull and defensive
Same as underlying
LT
Investment strategy
Risk level
Investment horizon
Valuation
Option component
Expiry date
Legal form
Upside cap
Knock-out feature
Trigger that alters the nature of theproduct
Lower limit
Upper limit
Nature of lower limit
Nature of upper limit
Graph: warrant/certificate simulation(at expiry)
Investment products
Profit
LossUnderlying Certificate
0
Profit
Loss Certificate Underlying
Protection level
% participation in upside
Profit
LossUnderlying Bonus Discount Jet Airbag
ST: Short Term: less than 6 monthsMT: Medium Term: Between 6 and 18 monthsLT: Long Term: more than 18 months
Product types
11
Bear indexation
Leverage products
Plain vanilla warrant
Call
Bull Bear Bull Bear Contained variation Bull BearBear
Opposite of the underlying
ST to LT
Simple
Negligible
Variable
Certificate
Limited to the underlying asset value
Yes (upper limit)
No
No
Yes
Knocks out product
No
No
Yes
No
Strike
No
Yes
Strike
Strike bought
Strike sold
Strike sold
Strike bought
No
Variable
Yes
Yes
Yes, 2
No
Yes
Yes
Knock-out
Knock-out
Yes
No
Yes
Variable
Knock-out ifsingle barrier
Knock-out
Knock-out
Knock-out ifsingle barrier
Variable
Yes
NoLimited to
the underlyingasset value
Yes Yes NoLimited to
the underlyingasset value
Warrant Certificate Warrant Certificate or Warrant
Yes Yes Yes Variable
Complex
Yes
Complex
Yes
Complex
Yes
Complex
Negligible
Risk of total loss of capital
Greater than the underlying
ST to MT
Greater than the underlying
ST to MT
Significantly greater than the underlying
ST to MT
Far greater than the underlying
ST to MT
Put Call Put
Spread (combination of options)Digital with double knock-out Leverage knock-out
Profit
LossCertificate Underlying
Knock-out
Entry level
0
Profit
Loss Underlying Call Put
Strike price
0
Profit
Loss Call Underlying Put
Lower limits
Upper limits
0
Profit
Loss Underlying Certificate
Knock-out barriers
0
Profit
Loss Call Underlying Put
Knock-out
0
ST: Short Term: less than 6 monthsMT: Medium Term: between 6 and 18 monthsLT: Long Term: more than 18 months
Knock-out barrier: the product matures prematurely if the underlying reaches thislevel. Trigger that alters the nature of product: certain characteristics of the product arepermanently altered if the underlying reaches this level
12
Investment products
The investor expects the underlying to go up in value
and does not wish, or is not able, to invest in it
directly.
Pure indexation: performance will exactly match
that of the underlying asset. The potential profit
will not be leveraged, but it is theoretically
unlimited. Potential losses are the same as those
in the underlying asset value.
The investor expects the underlying asset value to
rise, is not convinced of the potential increase and
wishes to limit the losses in the event that the
anticipated scenario does not occur.
Capital protection: risk is limited by the protection
level, while the potential profit is generally limited
to a specific percentage of the performance of the
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.
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.
13
Leverage products
The investor firmly expects the underlying to fall invalue.
Bear indexation: the performance is opposite to
that of the underlying. If the underlying asset
value falls, the investment will generate a return of
the same percentage (negative leverage of 1). If
the underlying asset value rises beyond a certain
level, the product will be ‘knocked out’ and the
investor will lose his entire investment.
The investor firmly expects the value of the underlyingto rise or to fall, wants to gain exposure to theunderlying and is prepared to accept a greater level ofrisk than that represented by the underlying itself.
Plain vanilla warrant: the potential performance
(gain or loss) is multiplied by leverage. This
depends on numerous factors, including the strike
price, the expiry date and the volatility of the
underlying. The gains are theoretically unlimited.
The level of the potential profit correlates with the
level of risk accepted. Potential losses are limited
to the initial investment. Losses could result from
two factors:
- The passage of time: the value of the warrant
declines as it approaches its expiry date.
- Expiry below the strike price for a call
warrant or above the strike price for a put
warrant: the investment is lost if the strike
price is not reached by the expiry date.
Warrants that are firmly out of the money
(with a very high strike price in the case of a
call or a very low one for a put) are cheaper
(and offer greater leverage), but there is a
greater risk that they will expire without
value.
The investor firmly expects a modest rise or fall in thevalue of the underlying, thinks that the scale of therise or fall in value will be limited, wishes to gainexposure to the underlying, and is prepared to accepta higher risk level than that associated with theunderlying itself.
Spreads (combination of options): the level of risk
and reward is comparable to that of plain vanilla
warrants, for a smaller investment. If the rise or
fall in value anticipated by the investor does not
occur (the underlying goes down in value rather
than rising or vice versa), the losses will be
smaller than would be incurred using a plain
vanilla warrant. If the underlying asset performs
better than anticipated (it rises or falls more than
expected), the gains will be less than would be
achieved using a plain vanilla warrant (potential
returns subject to upper limit). In all other cases,
the returns will be greater than would be obtained
using a plain vanilla warrant, as the sale of one
warrant partially finances the purchase of the
other.
The investor firmly expects a limited movement in thevalue of the underlying, wants to gain exposure to theasset in question and is prepared to accept a greater levelof risk than that represented by the underlying itself.
Digital knock-out: the potential gain is limited to a
fixed return on expiry. The investor could lose the
entire investment if the underlying asset value
reaches or passes one of the two limits set on
issue. The narrower the gap between the
underlying asset value and the two limits, the
greater the risk and the greater the profit
potential.
The investor firmly expects the value of the underlyingto move in the short term, thinks that this rise or fallwill occur without a return of trend, wishes to gainexposure to the underlying, and is prepared to accept agreater level of risk than that represented by theunderlying 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 tradingWarrants 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
unusual market conditions.
Designator and order typeTo 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 tradingThe 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.
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.
15
1- Determine your profileBefore making any investment decisions or choosing a
product, it is vital to identify your precise profile as an
investor. How much money are you prepared to risk in
this market? How much time do you have (per day,
week or month) and are you prepared to devote to
managing your portfolio? What goals do you have in
terms of returns? How much are you willing to invest to
achieve those goals? The answers you give to these
questions will help you choose products with more or
less risk exposure, and more or less volatility.
2- Have clear viewsBefore making any investment decision, it is
imperative that you carry
out a preliminary analysis
of the market in general
and of the underlying asset
in particular. You have to
form a clear view of how
the underlying is likely to
move. Your investment
strategy and choice of
product will be based on
the rise or fall in value that
you anticipate.
3- Set targetsAs an investor, you have to
set yourself buying and
selling targets. It is vital to time your purchase
correctly. Once the predicted scenario has occurred,
you must not hesitate to close your position and take
your profit. Conversely, you must not hesitate to close
your position in order to limit your losses. This
strategy is all the more important when dealing with
leverage products and products sensitive to time
value.
4- Diversify your portfolioHoldings 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.
5- Optimise your tradingWarrants and certificates require regular monitoring.
Taking too many positions at once over several
products can reduce the quality with which you
manage your investments. You can diversify across
products with different risk profiles, provided that you
can still devote the necessary time to tracking your
positions.
6- Choose the right maturityIf a product has an expiry date, the closer it
approaches to that date, the riskier it becomes and
the quicker it will have to be sold. That means it is
less likely to realise a
return. You need to
choose an expiry date
that matches your
investment goals,
while maintaining a
certain safety margin.
Ideally, the life of the
selected products
should be at least
four times longer than
the scenario you have
in mind.
7- Understandthevaluationfactors
The valuation of some products is easy to understand:
it basically depends on movements in the value of the
underlying asset. Others, by contrast, are complicated,
involving factors like time value and volatility. You
need to master concepts like this before investing in
products of this kind.
Seven golden rules for warrant and certificate investors
16
How do warrants differ fromoptions?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 formWarrants 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.
• AccessibilityWarrants can be bought or sold via a regular
securities account. You need to open a special
account to trade options.
• StandardisationOptions 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 assetsWarrants offer a wide range of underlying assets.
Options are mainly issued on shares, indices,
commodities and interest rates.
• Issue capacityAn 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.
Appendix
17
How do certificates differ fromETFs?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 formETFs 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.
• MaturityETFs have an unlimited life. Certificates can have
an expiry date.
• DistributionETFs can distribute dividends. This is not always
the case for certificates.
• Diversity of underlying assetsCertificates 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.
• LiquidityGenerally 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
American warrantA warrant is referred to as ‘American’ when it can beexercised at any time between issue and expiry.
At the moneyA product is ‘at the money’ when its strike price is near orequal to the market price of the underlying asset.
Break-even pointThe level the underlying must have reached on the product’sexercise date in order for the investor to recover the initialoutlay.
Call warrantA call warrant gives the right, but not the obligation, to buyan underlying asset at a price fixed at issue for a specifiedperiod.
CertificateA certificate is a listed security issued by a financialinstitution, accessible from a standard securities account,with settlement terms on expiry that are known at the time ofissue.
DeltaCoefficient used to calculate the number of units by whichthe product will change when the underlying asset changesby one unit. A product with a delta of 100%, for instance,will reproduce 100% of the change in the value of theunderlying asset.
ElasticityParameter allowing a product’s sensitivity to changes in theprice of the underlying to be expressed as a percentage.Elasticity = (price of underlying / (price of product x parity) xdelta.
European warrantA warrant is referred to as « European » when it can only beexercised on its expiry date.
ExerciseExercising a warrant or certificate means using the rightattached to it.
Exercise price (or strike)The price at which the holder may buy or sell the underlying.It is fixed at the moment the product is issued.
Expiry date (or maturity)Date on which the right to buy or sell an instrument expires.This date represents the limit of the warrant or certificate’slife.
GearingRatio of the price of the underlying to the product price,adjusted for parity.
In the moneyA call product is ‘in the money’ when the price of theunderlying is higher than the strike. A put product is in themoney when the price of the underlying is lower than thestrike.
Intrinsic valueThe positive difference between the price of the underlyingand the strike price in the case of a call product, or thepositive difference between the strike price and the price ofthe underlying in the case of a put product.
Knock-outIf the market price of the underlying passes the knock-outlevel, the right conferred by the product is cancelled.
LeverageRatio of the warrant or certificate price to that of theunderlying. Movements in a warrant or certificate are oftenproportionally greater than those in the underlying.
Out of the moneyA call product is ‘out of the money’ when the price of theunderlying is lower than the strike. A put product is out ofthe money when the price of the underlying is higher thanthe strike.
ParityThe number of products you have to acquire to exercise yourright with regard to the underlying asset. A parity of 10 on acall product over a share, for instance, means that you wouldhave to exercise ten products to purchase a share at thestrike price.
Plain vanilla warrantStructured investment instrument with a continuous marketlisting that gives the right, but not the obligation, to buy orsell a chosen asset at a price fixed at issue during apredetermined period.
PremiumPercentage by which the value of the underlying must movein order to reach break-even.
Put warrantA put warrant gives the right, but not the obligation, to sellan underlying asset at a price fixed at issue for a specifiedperiod.
SecurityTradable financial instrument issued by a company or apublic institution, which may be listed and traded on anexchange (e.g. shares, bonds, warrants and certificates).
ThetaCoefficient measuring a product’s sensitivity to the passageof time.
Underlying Financial instrument (share, bond, index, exchange rate,interest rate, commodity, etc.) to which the warrant orcertificate relates.
Unit of tradeMinimum quantity of products that can be traded.
VolatilityIndicator of the likelihood that an asset will fluctuate invalue. Volatility is calculated mathematically as theannualised standard deviation of the returns on theunderlying.
Glossary
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
capitalisation of listed companies and average daily trading value of approximately
$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
investors, issuers, and all users of its markets.
20
This publication is solely intended as information and does not constitute any investment advice or an offer, solicitation or recommendation to acquireor dispose of any investment or to engage in any transaction. Although this publication is issued in good faith, no representation or warranty, express orimplied, 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 exchangesoperated by NYSE Euronext’s subsidiaries shall depend solely on the applicable rules of the market operator. NYSE Euronext encourages you to reachyour own opinion as to whether investments are appropriate or relevant and recommends you not to make any decisions on the basis of the informationcontained 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 position in the relevant territory and to understand the related risks. All proprietary rights and interest in or connected with this publication are vested inNYSE 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,transformation, or adaptation) without the prior written permission of NYSE Euronext. NYSE Euronext refers to NYSE Euronext and its affiliates and 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.
© February 2008, NYSE Euronext. All rights reserved.
Contacts
For futher information, log on to www.nyseeuronext.comIf you have any question about warrants & certificates, e-mail us at: [email protected]
Amsterdam
P.O. Box 19163
1000 GD Amsterdam
The Netherlands
Tel. +31 (0)20 550 5555
Fax +31 (0)20 550 4900
Brussels
Palais de la Bourse/Beurspaleis
Place de la Bourse/Beursplein
1000 Brussels
Belgium
Tel. +32 (0)2 509 12 11
Fax +32 (0)2 509 12 12
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
London
Cannon Bridge House
1 Cousin Lane
London EC4R 3XX
United Kingdom
Tel. +44 (0)20 7623 0444
Fax +44 (0)20 7588 3624
Paris
39, rue Cambon
75039 Paris Cedex 01
France
Tel. +33 (0)1 49 27 10 00
Fax +33 (0)1 49 27 11 71
Warrants &CertificatesGuideSeason your strategy
www.nyseeuronext.com2008 © NYSE Euronext, Inc. All Rights Reserved.
AMSTERDAM BRUSSELS CHICAGO LISBON LONDON NEW YORK PARIS SAN FRANCISCO
SR/ID/022008/500
Investment
products
Pure indexation
Investment strategy
Risk level
Investment horizon
Valuation
Option component
Expiry date
Legal form
Upside limit
Knock-out Trigger that alters the nature of the productLower limit
Upper limit
Nature of lower limit
Nature of upper limit
Pure indexation
Capital protection
Capital protectionBull anddefensive
Less thanunderlying
MT to LT,according toproduct life
Bull anddefensive
Same asunderlying
LT (2 to 3 years)
Same asunderlying
ST to LT,according toproduct life
Less thanunderlying
ST to MT
Same asunderlying
MT (average 1 year)
Bull anddefensive
Moderatelybullish
Neutral to slightlybullishBull
Same asunderlying
ST to LT
Simple
No
With or without
Certificate
No
No
No
No
No
Alteringtrigger
Maximumsettlement
Variable
No
No
Yes
No
Capitalguarantee
Alteringtrigger
Bonus level Maximumsettlement
Maximumsettlement
Doubling ofperformance
No
No
Yes
Variable
No
Yes
Yes
Yes
No
No
No
Yes
No
No
Yes
Yes
Variable No Yes Yes
Certificate Certificate Certificate Certificate Certificate
Complex
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Complex Complex Complex Complex
Airbag Bonus Discount Jet/Sprint
Yield enhancement
Investment products
ST: Short Term: less than 6 months MT: Medium Term: between 6 and 18 months LT: Long Term: more than 18 months
Knock-out barrier: the product expires prematurely if the underlyingreaches this level. Altering trigger: certain characteristics of the product are permanentlychanged if the underlying reaches this level.
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: generally yes (deducted pro rata
temporis)• Parity: varies by product• Investment profile: bull strategy • Risk level: identical to underlying• Investment horizon: from short to long term, depending
on strategy• Valuation: transparent (equivalent to a
fraction of the underlying)• Knock-out feature no• Trigger that alters the nature of the product: no• Option component: no• Expiry date: with or without• Legal form: certificate
Strategies/ProfilePure indexation certificates offer their holders exposure to an underlying asset for afraction of the underlying’s price. Investing in a pure indexation certificate enablesyou to diversify your portfolio over a given asset at a lower cost, while gainingexposure to the same movements in the asset’s market value as you would from adirect investment. A pure indexation certificate also frees the holder from the risksassociated with investing in the underlying, such as insurance, storage anddeterioration in the case of precious metals, and the costs incurred with futuresholdings.
Pure indexationcertificate
A pure indexation productis an investment instrument that closelytracks the performance ofthe underlying asset. The latter is generally an index, basket ofshares, interest rate or commodity.
Please turn over
Investment products
Pure indexation
Profit
LossUnderlying Certificate
0
Sheet I 1
Situation 1:The price of the underlying asset ABC increases by 3%• Underlying asset value: 103 euros.• Product value: 10.29 euros• Investor’s profit: 2.90%• Deviation in gain/loss compared to underlying: -0.1%
Situation 2: The price of the underlying asset ABC falls by 3%• Underlying asset value: 97 euros• Product value: 9.68 euros• Investor’s loss: 3.20%• Deviation in gain/loss compared to underlying: -0.2%
Pure indexationcertificate (continued)
ExamplePure indexation product with
the underlying asset ABC: • The initial value of which is
100 euros. • Parity is 1/10. • The initial value of the
product is 10 euros.
Profit
LossUnderlying Certificate
0
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: generally no • Parity: varies by product• Investment profile: bull and defensive strategy• Risk level: lower than the underlying (partial
or total capital protection)• Investment horizon: medium to long term, depending
on the product’s life• Valuation: relatively complex• Knock-out feature: no• Trigger that alters the nature of the product: no• Option component: yes• Expiry date: yes• Legal form: certificate
Strategies/ProfileCapital-protected products allow their holders to pursue defensive investmentstrategies. They are excellent tools for gaining exposure to a market with low or evenzero risk. There are, however, a great many types of capital-protected products, eachwith its own specific profile in terms of potential gains and losses. Most can besubscribed to for a fixed price during a period determined by the issuer (subscriptionperiod). Their subsequent value reflects movements in the underlying asset and ininterest rates (option component). That means valuing these products is oftencomplicated. Careful study of their characteristics, especially the conditions to whichthe capital guarantee is subject, is required before any investment.
Profit
Loss Certificate Underlying
Protection level
% participation in upside
Capitalprotectedproduct
A capital-protected product enables theinvestor to gain full orpartial exposure to anunderlying asset, whileenjoying a guarantee onall or part of the investedcapital in the event thatthe value of the assetfalls. The guaranteemight apply throughoutthe life of the product or merely on expiry.
Please turn over
Investment products
Capital protection
Sheet I 2
Situation 1:The price of the underlying asset ABC increases by 30%• Underlying asset value on expiry: 130 euros• Product value: 11.5 euros• Investor’s profit: 15%• Deviation in gain/loss compared to underlying: -15%
Situation 2: The price of the underlying asset ABC falls by 20%• Underlying asset value on expiry: 80 euros• Product value: 10 euros• Investor’s loss: 0%• Deviation in gain/loss compared to underlying: 20%
Capitalprotectedproduct(continued)
ExampleCapital-protected product withthe underlying asset ABC• Initial underlying asset
value: 100 euros• Protection level: 100 euros• Participation: 50%• Parity: 1/10
Profit
Loss Certificate Underlying
Protection level
% participation in upside
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: bull and defensive strategy• Risk level: identical to underlying• Investment horizon: short to medium term, depending
on the product’s life• Valuation: complex• Knock-out feature: no• Trigger that alters the nature of the product: yes• Option component: yes• Expiry date: yes• Legal form: certificate
Strategies/ProfileAirbag products enable investors, under certain market conditions, to enhance theupside performance of an underlying asset, while protecting part of their capital (the « airbag effect ») if the underlying asset falls slightly in value. The degree ofenhancement is subject to different levels within the performance of the underlyingasset. It is determined on expiry whether the underlying has passed these levels. The more strongly the underlying performs, the greater the enhancement effect willbe. It is, however, subject to an upper limit.
Airbag certificate
Airbag products areinvestment instrumentsthat offer their holdersamplified exposure to anunderlying asset, whilegiving them a capital guarantee, provided thatthe value of the underlying does not fallbelow a certain percentage fixed at thetime of issue. The amplified exposure issubject to an upper limiton any increase in theunderlying asset, the levelof which is also fixed on issue.
Please turn over
Investment products
Yield enhancement
Profit
Loss UnderlyingCertificate
0
Sheet I 3
Situation 1:The price of the underlying asset ABChas risen 5% on expiry• Underlying asset value: 105 euros• Product value: 10.5 euros• Investor’s profit: 4.9%• Deviation in gain/loss compared to
underlying: -0.1%
Situation 2: The price of the underlying asset ABChas risen 15% on expiry• Underlying asset value: 115 euros• Product value: 11.75 euros (100%
of 1 euro for the first 10% and 150%of 0.5 euro for the next 5% - i.e. 0.75 euro)
• Investor’s profit: 17.4%• Deviation in gain/loss compared to
underlying: 2.4%
Situation 3: The price of the underlying asset ABChas risen 40% on expiry• Underlying asset value: 140 euros• Product value: 13.5 euros (maximum
settlement)• Investor’s profit: 34.85%• Deviation in gain/loss compared to
underlying: -5.15%
Situation 4: The price of the underlying asset ABChas fallen 15% on expiry• Underlying asset value: 85 euros• Product value: 10 euros (airbag effect)• Investor’s loss: 0.01%• Deviation in gain/loss compared to
underlying: 14.99%
Situation 5: The price of the underlying asset ABChas fallen 40% on expiry. That meansthe product has fallen 15% below theairbag level.• Underlying asset value: 60 euros• Product value: 8 euros• Investor’s loss: 20%• Deviation in gain/loss compared to
underlying: 20%
Airbag certificate(continued)
ExampleAirbag product with the
underlying asset ABC
• Expiry: 3 years
• Performance enhancement at
each level:
➱ 100% if the underlying
increases in value by 0-10%
➱ 150% if the underlying
increases in value by 10-20%
➱ 200% if the underlying
increases in value by 20-25%
➱ Any value increase beyond
25% is subject to an upper
limit of 13.5 euros (100 +
100% x (110 - 100) +
150% x (120 - 110) +
200% x (125 -120)) / 10
• Airbag effect: 80% of the
underlying asset value on issue
• Parity: 1/10
• Underlying asset value on
issue: 100 euros
• Product value on issue:
10.01 euros
• The investor buys 10 products
at 10.01 euros
Profit
Loss UnderlyingCertificate
0
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: neutral to slight bull strategy• Risk level: lower than the underlying• Investment horizon: short to medium term• Valuation: complex• Knock-out feature: no• Trigger that alters the nature of the product: yes• Option component: yes• Expiry date: yes• Legal form: certificate
Strategies/ProfileInvestors profit from the entirety of any increase in the underlying asset value, whileprotecting their capital to the level fixed by the lower barrier. They will only incur aloss if that barrier is reached and if the underlying asset price turns out to be lessthan the price of the certificate. Bonuses are investment products with the potential for enhanced performance,without exposure to a greater risk than that associated with investing in theunderlying. There is no upside limit, which means investors can take full advantageof a rise in value, while guaranteeing a minimum return provided that the lower limitis not reached. Above the bonus level, the product’s performance will be the same asthat of the underlying asset.
Bonus certificate
This product offers investors a bonus on expiry, provided that itsvalue has remained between a lower and anupper limit fixed onissue. If either of theselimits is passed, settlement on expiry willbe equal to the closingprice of the underlying. If the lower limit is passed, the bonus is cancelled and the product thereafterbehaves like a pureindexation certificate.Passing the upper limit does not cancel the bonus.
Please turn over
Investment products
Yield enhancement
Profit
Loss Price 1 Price 2 and underlying asset priced
Lower limit
Upper limit
Sheet I 4
Situation 1:The price of the underlying asset ABC has risen 25% on expiry• Value of the underlying: 125 euros• Settlement value: 125 euros• Investor’s profit: 25%• Deviation in gain/loss compared to underlying: 0%
Situation 2: The price of the underlying asset ABC has fallen 11% on expiry. The underlyingasset price did not reach the lower limit (below 80 euros) before expiry. • Underlying asset value: 89 euros• Settlement value: 120 euros (Bonus value)• Investor’s profit: 20%• Deviation in gain/loss compared to underlying: 31%
Situation 3: The price of the underlying asset ABC has fallen 36% on expiry. • Underlying asset value: 64 euros• Settlement value: 64 euros• Investor’s loss: 36%• Deviation in gain/loss compared to underlying: 0%
Situation 4: The price of the underlying asset ABC has risen 2% on expiry. The underlying assetprice 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%
Bonus certificate(continued)
ExampleBonus product with the
underlying asset ABC
• Expiry: 3 years
• Underlying asset value on
issue: 100 euros
• Price of Bonus certificate:
100 euros
• Bonus level: 120 euros
• Lower limit: 80 euros
• Parity: 1/1
The investor buys 1 certificate
at 100 euros
Profit
Loss Price 1 Price 2 and underlying asset priced
Lower limit
Upper limit
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: neutral to slight bull strategy• Risk level: lower than the underlying• Investment horizon: short to medium term• Valuation: complex• Knock-out feature: no• Trigger that alters the nature of the product: no• Option component: yes• Expiry date: yes• Legal form: certificate
Strategies/ProfileDiscount products are suitable for investors who expect the underlying asset value toremain flat or to rise by a small amount. If the underlying asset value should fall (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, a discount product increases in value over time, since its value on expiry has to bethe same as the underlying (subject to the upper settlement limit). Three settlementscenarios are possible if the product is held to maturity (see example).
Discountcertificate
The Discount productenables investors to gainexposure to an underlyingasset while benefitingfrom a discount on thepurchase price. In exchange for thisimmediate benefit, thesettlement of the producton expiry is subject to anupper limit set at thetime of issue.
Please turn over
Investment products
Yield enhancement
Profit
Loss Underlying Certificate
Maximum settlement
Sheet I 5
Situation 1:The price of the underlying asset ABC has risen 10% on expiry• Underlying asset value: 11 euros• Product’s settlement value: 11 euros• Investor’s profit 15.79%• Deviation in gain/loss compared to underlying: 5.79%
Situation 2: The price of the underlying asset ABC has risen 35% on expiry• Underlying asset value: 13.5 euros• Product’s settlement value: 12 euros (maximum settlement price)• Investor’s profit: 26.32%• Deviation in gain/loss compared to underlying: -8.68%
Situation 3: The price of the underlying asset ABC has fallen 15% on expiry• Underlying asset value: 8.5 euros• Product’s settlement value: 8.5 euros• Investor’s loss: -10.53%• Deviation in gain/loss compared to underlying: 4.47%
Discountcertificate(continued)
ExampleDiscount product with the
underlying asset ABC
• Expiry: 1 year
• Original price of the
underlying: 10 euros
• Price of the Discount
product: 9.5 euros
• Maximum settlement price:
12 euros
• Parity: 1/1
The investor buys 1 certificate
at 9.5 eurosProfit
Loss Underlying Certificate
Maximum settlement
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: moderate bull strategy• Risk level: identical to underlying• Investment horizon: medium term (average 1 year)• Valuation: complex• Knock-out feature: no• Trigger that alters the nature of the product: no• Option component: yes• Expiry date: yes• Legal form: certificate
Strategies/ProfileJet 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, inprinciple, substantially greater than that of the underlying, while the level of risk inthe event of a fall in value is the same. The additional profit potential offered by theproduct compared to the underlying is built up progressively over time and is onlyfully realised (if at all) on expiry. Three settlement scenarios are possible if theproduct is held to maturity (see example). Before purchasing a Jet product at a pricehigher than that of the underlying, it is vital to calculate the theoretical break-evenpoint for the investment.
Jet/Sprintcertificate
The Jet (or Sprint) product gives investorsthe opportunity to doublethe performance of anunderlying asset if thatasset closes at a pricebetween two limits (upperand lower) fixed at thetime of issue. This performance is subject toan upper settlement limit,which is also fixed onissue. If the value of theasset falls and the underlying closes belowthe lower limit, the valueof the Jet product will beequal to the closing priceof the underlying.
Please turn over
Investment products
Yield enhancement
Profit
Loss Certificate Underlying
Upper limit
Lower limit
Sheet I 6
Situation 1:The price of the underlying asset ABC is 108 euros on expiry. The closing price isbetween the two limits. Settlement is equal to: lower limit + 2 times (closing price -lower limit)• Underlying asset value: 108 euros• Return on the underlying: 8%• Product’s settlement value: 120 euros• Investor’s profit: 16.51%• Deviation in gain/loss compared to underlying: 8.51%
Situation 2: The price of the underlying asset ABC is 115 euros on expiry. The closing price isabove the upper limit. Settlement is equal to: lower limit + 2 times (upper limit -lower limit)• Underlying asset value: 115 euros• Return on the underlying: 15%• Product’s settlement value: 124 euros (maximum settlement limit)• Investor’s profit: 20.39%• Deviation in gain/loss compared to underlying: 5.39%
Situation 3: The price of the underlying asset ABC is 95 euros on expiry. The closing price is lessthan the lower limit. Settlement is equal to the closing price of the underlying.• 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%
Jet/Sprintcertificate(continued)
ExampleJet product with the
underlying asset ABC
• Expiry: 1 year
• Initial price of the
underlying: 100 euros
• Product price: 103 euros
• Lower limit: 96 euros
• Upper limit: 110 euros
• Maximum settlement limit:
124 euros
• Parity: 1/1
The investor buys 1 product at
103 euros
Profit
Loss Certificate Underlying
Upper limit
Lower limit
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: yes• Parity: varies by product• Investment profile: bull strategy • Risk level: identical to underlying• Investment horizon: from short to long term, depending
on strategy• Valuation: transparent (equivalent to a
fraction of the underlying)• Knock-out feature: no• Trigger that alters the nature of the product: no• Option component: no• Expiry date: no• Legal form: certificate
Strategies/ProfileETC certificates allow the investor to gain exposure to an underlying commodity forall or part of the price of the underlying. In other words, investing in an ETC enablesyou to diversify your portfolio over a particular commodity at a lower cost, whilegaining the same exposure to movements in the price of that commodity as youwould have obtained by investing directly. An ETC also frees the holder from therisks associated with investing in the underlying asset, such as insurance, storageand deterioration in the physical commodity.
ExchangeTradedCommodities(ETC)
An ETC is simply a pureindexation certificate forwhich the underlying is acommodity. ExchangeTraded Commodities areundated zero-couponbonds backed by acontract giving it exposure to the underlying commodity.ETCs directly track movements in the priceof the commodity itselfrather than in the shareprice of companies specialising in the commodity sector. Theyallow investors to obtainthis exposure withouthaving to manage futuremarket investments or totake physical delivery ofthe underlying.
Please turn
Investment products
Pure indexation
Profit
LossUnderlying Certificate
0
Sheet I 7
Situation 1:The price of the underlying commodity ABC increases by 3%• Underlying asset value: 103 euros• Certificate value: 10.29 euros• Investor’s profit: 2.90%
Situation 2: The price of the underlying commodity ABC falls by 3%• Underlying asset value: 97 euros• Certificate value: 9.69 euros• Investor’s loss: 3.10%
ExchangeTradedCommodities (ETC)(continued)
ExampleETC with the underlying
commodity ABC:
• The initial value of which is
100 euros.
• Parity is 1/10.
• The initial value of the
certificate is 10 euros.Profit
LossUnderlying Certificate
0
ST to MT
Strike Strike sold Strike sold AlteringtriggerStrike bought
Strike bought Strike sold Alteringtrigger Strike sold
Limited to the underlying
asset valueYes
No
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Certificat
Complex
Bear Bull
Greater than the underlying
Bear Bull Bear
Spread (combination of options)
Spread (combination of options)
Spread Plus(combination of options)
Put
ST to LT ST to MT
Opposite of theunderlying
Risk of total loss of capital
Knocks outproduct
Strike
Yes (upper limit)
No
No
Yes
Certificat
Limited to the underlying
asset valueNo
Negligible
Variable
Yes
Yes
Warrant
No
No
Yes
No
Simple Complex
Bear indexation
Bear indexation
Bear Bull
Plain vanilla warrant
Plain vanilla warrant
Greater than the underlying
Call
Leverage products
Investment strategy
Risk level
Investment horizon
Valuation
Option component
Expiry date
Legal form
Upside limit
Knock-out featureTrigger that alters the nature of the productLower limit
Upper limit
Nature of lower limit
Nature of upper limit
Leverageproducts
Strike = exercise price
ST to MT ST to MT
Knock-out
Knock-out
Knock-out Strike
Knock-out Strike
Knock-out
Knock-out
Yes
Yes, 2
No
Yes
Yes
Yes
No
Yes
No
No
Yes
Yes
Yes
Yes
Yes
NoLimited to
the underlyingasset value
NoLimited to
the underlyingasset value
Yes
Yes
Warrant
Negligible
Yes
Certificate or Warrant
No
Complex Simple Transparent
Weak variation
Substantially greater than the underlying Far greater than the underlying
Bull Bear Bull Bear
Digital with double knock-out
Digital with double knock-out Leverage knock-out Leverage knock-out
with financing level
Call
Leverage knock-out
Put Call Put
Risk of total loss of capital
Investment strategy
Risk level
Investment horizon
Valuation
Option component
Expiry date
Legal form
Upside limit
Knock-out featureTrigger that alters the nature of the productLower limit
Upper limit
Nature of lower limit
Nature of upper limit
Leverage products
Leverageproducts(continued)
ST: Short Term: less than 6 monthsMT: Medium Term: between 6 and 18 monthsLT: Long Term: more than 18 months
Knock-out barrier: the product expires prematurely if theunderlying reaches this level. Alterning trigger: certain characteristics of the product arepermanently changed if the underlying reaches this level
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: generally yes (deducted pro rata
temporis)• Parity: varies by product• Investment profile: bear strategy• Risk level: virtually identical to the opposite
of the underlying• Investment horizon: short to long term• Valuation: transparent (difference between
reference level fixed on issue andthe underlying asset price,adjusted for parity, excludingmanagement fees)
• Knock-out feature: yes (upper limit)• Trigger that alters the nature of the product: no• Option component: negligible• Expiry date: with or without• Legal form: certificate
Strategies/ProfileBear indexation products are suitable for investors who expect the underlying assetvalue to fall and who want to limit their risk to the amount invested. They generatethe opposite performance to the underlying, some products are adjusted to exchangerate movements. Their value equals the difference between a reference level (fixedon issue) and the underlying asset price.
Bear indexation
Bear indexation productsoffer investors the opposite performance tothat of the underlyingasset. A safety threshold(close or equal to a reference level fixed atthe time of issue) acts asa cut-off to limit the riskof loss if the underlyingasset price should rise.This means the maximumloss that the investor canincur is limited to theamount invested, unlike atraditional short sale,where the maximum lossis theoretically unlimited.
Please turn over
Leverage
Bear indexation
Profit
LossCertificate Underlying
Knock-out
Entry level
0
Sheet L 1
Situation 1:The underlying asset price is 90 points• Underlying asset value: 90 points• Return on the underlying: -10%• Certificate value: 1.10 euro (reference level - underlying asset value, adjusted for
parity, i.e. (200 - 90) / 100) = 1.10• Investor’s profit/loss: 10%
Situation 2: The underlying asset price is 110 points• Underlying asset value: 110 points• Return on the underlying: 10%• Product value: 0.90 euro (reference level - underlying asset value, adjusted for
parity, i.e (200 - 110) / 100)• Investor’s profit/loss: -10%
Situation 3: The underlying asset price is 195 points• Underlying asset value: 195 points• Return on the underlying: 95%• Product value: knocked out and settled• Settlement value: 0.05 euro (reference level - underlying asset value, adjusted for
parity, i.e (200 - 195) / 100)• Investor’s profit/loss: -95%
Bear indexation(continued)
ExampleBear indexation product with
the underlying asset ABC
• Initial underlying asset price
100 points
• Certificate price: 1 euro
• Reference level: 200 points
• Safety threshold: 190
points (95% of reference
level)
• Parity: 1/100
The investor buys 1 product
at 1 euro
Profit
LossCertificate Underlying
Knock-out
Entry level
0
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: bull (call warrant) or bear strategy
(put warrant)• Risk level: greater than the underlying• Investment horizon: short to medium term• Valuation: complex (time value, volatility, etc.)• Knock-out feature: no• Trigger that alters the nature of the product: no• Option component: yes• Expiry date: yes• Legal form: warrant
Strategies/ProfilePlain vanilla warrants are suitable for investors who want to share in the rise (callwarrant) or fall (put warrant) in the underlying asset value, for an initial investmentlower than the price of the underlying. In other words, warrants offer leverage withrespect to the underlying asset. Their profit potential is far greater than that of theunderlying. In theory, it is unlimited. Their risk profile is also much higher than thatof the underlying, but potential losses cannot exceed the amount invested. A clearunderstanding of how these products function is vital before investing in them. Theprice of a warrant moves in accordance with several criteria in addition to changes inthe 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 thewarrant’s expiry date approaches. A warrant loses roughly two thirds of its valueduring the final third of its life. The warrant price is also sensitive to the volatility ofthe underlying asset. The higher the volatility, the higher the warrant price. If thevolatility diminishes, the value of the warrant also falls.
Profit
Loss Underlying Call Put
Strike price
0
Plain vanillawarrant
A plain vanilla warrantgives the holder the right,but not the obligation, tobuy (in the case of a callwarrant) or to sell (in thecase of a put warrant) theunderlying asset at a predetermined price (the strike price or exercise price) up to agiven date (expiry). Thelife of the warrant terminates on that date.The price the buyer paysfor this right is less thanthat of the underlyingasset. Plain vanilla warrants never exposetheir holders to a risk ofloss greater than their initial investment.
Please turn over
Leverage
Plain vanilla warrant
Sheet L 2
Situation 1:The price of the underlying asset ABC is 125 euros on expiry• Underlying asset value: 125 euros• Return on the underlying: 25%• Value of the warrant on expiry: 25 euros (underlying asset value - strike price)• Investor’s profit/loss: 108%
Situation 2: The price of the underlying asset ABC is 80 euros on expiry• Underlying asset value: 80 euros• Return on the underlying: -20% (loss of 20 euros)• Value of the warrant on expiry: 0 euro• Investor’s profit/loss: -100% (loss of 12 euros)
Plain vanillawarrant(continued)
ExampleCall warrant with the
underlying asset ABC
• Initial underlying asset
price: 100 euros
• Warrant price: 12 euros
• Warrant strike price:
100 euros
The investor buys 1 warrant at
12 euros Profit
Loss Underlying Call Put
Strike price
0
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: bull (call Spread) or bear strategy
(put Spread)• Risk level: greater than the underlying• Investment horizon: short to medium term• Valuation: relatively complex (time value,
volatility, etc.)• Knock-out feature: no• Trigger that alters the nature of the product: no• Option component: yes• Expiry date: yes• Legal form: certificate
Strategies/ProfileCall Spread and put Spread certificates are comparable in economic terms withplain vanilla warrants. If you buy a call Spread certificate, for instance, you aresimultaneously purchasing a call warrant with the lower limit as its strike price andselling a call warrant with the upper limit as its strike price and the same expirydate. The exposure to the time value generated by buying one call is partially offsetby selling the other. Spread certificates offer cheaper and less volatile hedging thanwould be obtained by purchasing a plain vanilla warrant.
Combinationof optionsbuy/sell (callSpread andput Spread)
These certificates, based on acombination of options, offerinvestors exposure to movements in an underlyingasset in a bull market (callSpread) or bear market (putSpread). The investor’s returnon expiry depends on theunderlying asset value and whether or not it falls betweenan upper and a lower limit fixedon issue. If the underlyingcloses between the two limits,the value of the certificate willbe equal to the underlying assetvalue minus the lower limit(call Spread) or the upper limitminus the underlying assetvalue (put Spread). If theunderlying closes below thelower limit (call Spread) orabove the upper limit (putSpread), the value of the certificate on expiry is zero. Themaximum capital gain is knownat the time of issue (maximumsettlement). The risk is limitedto the amount invested.
Please turn over
Leverage
Spread (combination of options)
Profit
Loss Call Underlying Put
Lower limits
Upper limits
0
Sheet L 3
Situation 1:The price of the underlying asset ABC is 75 euros on expiry. The lower limit hasbeen passed.• Underlying asset value: 75 euros• Return on the underlying: -25%• Value of call Spread on expiry: 0 euro• Investor’s profit/loss: -100% (-125 euros)
Situation 2: The price of the underlying asset ABC is 90 euros on expiry. The underlying isbetween the two limits.• Underlying asset value: 90 euros• Return on the underlying: -10%• Value of call Spread on expiry: 10 euros (difference between underlying and lower
limit)• Investor’s profit/loss: -20% (100 euros - 125 euros)
Situation 3: The price of the underlying asset ABC is 120 euros on expiry. The underlying isabove the upper limit.• Underlying asset value: 120 euros• Return on the underlying: 20%• Value of call Spread on expiry: 20 euros (difference between the two limits)• Investor’s profit/loss: 60% (200 euros - 125 euros)
Combinationof optionsbuy/sell (callSpread andput Spread)(continued)
ExampleCall Spread with the
underlying asset ABC
• Initial underlying asset
price: 100 euros
• Price of call Spread:
12.5 euros
• Lower limit: 80 euros
• Upper limit: 100 euros
• Maximum potential gain:
20 euros
The investor buys 10 call
Spreads at 12.5 euros, giving
a total purchase cost of 125
euros
Profit
Loss Call Underlying Put
Lower limits
Upper limits
0
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: more dynamic portfolio management• Risk level: higher than the underlying• Investment horizon: short to medium term• Valuation: relatively complex (time value, volatility,
etc.)• Knock-out feature: no• Trigger that alters nature of the product: yes• Option component: yes• Expiry date: yes• Legal form: certificate
Strategies/ProfileCall Spread Plus and put Spread Plus products offer investors a double opportunityto obtain the maximum settlement fixed on issue. Unlike the basic call Spread andput Spread, they are guaranteed to receive the maximum settlement if the finalunderlying asset value is higher than the upper limit for a call Spread Plus (or belowthe lower limit for a put Spread Plus), but also if the final asset value falls betweenthese two limits, provided that the underlying asset value did not pass the lower (callSpread Plus) or upper limit (put Spread Plus) during the life of the product.Investors choose a call Spread Plus when they expect a slight increase, stability oreven a slight fall (but not below the lower limit) in the underlying asset value. In thecase of a put Spread Plus, the investor expects a fall, stability or even a slightincrease (but not beyond the upper limit) in the underlying asset value.
Combination ofoptions buy/sellcertificates (call SpreadPlus and putSpread Plus)
Call Spread Plus and putSpread Plus certificates arebased on a combination ofoptions and offer investorsexposure to movements in anunderlying asset in a bullmarket (call Spread Plus) orbear market (put SpreadPlus). The investor’s returnon expiry depends on thebehaviour of the underlyingduring the life of the pro-duct. If, in the case of a bullproduct, the underlyingpasses the lower limit (callSpread Plus) or in the caseof a bear product, the upperlimit (put Spread Plus) fixedon issue, the product willsubsequently behave exactlylike a call Spread or putSpread certificate respectively(see Sheet L 3). In all othercases, the investor will receive on expiry the maximumsettlement amount, equal tothe difference between thetwo limits.
Leverage
Spread(combination of options)
Profit
LossCall UnderlyingPut
Lower limit
Upper limit
Price 2Price 1
Sheet L 4
Combination ofoptions buy/sellcertificates (call SpreadPlus and putSpread Plus)(continued)
ExampleSpread Plus Put with the
underlying asset ABC
• Initial underlying asset
price: 100 euros
• Price of put Spread Plus:
15 euros
• Lower limit: 130 euros
• Upper limit: 150 euros
• Maximum potential gain:
20 euros
The investor buys 10 put
Spread Plus at 15 euros,
giving a total purchase cost
of 150 euros.
Profit
LossCall UnderlyingPut
Lower limit
Upper limit
Price 2Price 1
Situation 1:The price of the underlying asset ABC is 90 euros on expiry
The underlying has reached the upper limit(150 euros) during the life of the product• Underlying asset value on expiry:
90 euros • Return on the underlying: -10% • Value of the put Spread Plus on
expiry: 20 euros (the lower of: upperlimit minus underlying asset price(150 - 90) and the maximum gain)
• Investor’s profit/loss: 25% (50 euros)
The underlying has not reached the upperlimit (150 euros) during the life of theproduct• Underlying asset value on expiry:
90 euros• Return on the underlying: -10%• Value of the put Spread Plus on
expiry: 20 euros (maximum gain)• Investor’s profit/loss: 25% (50 euros)
Situation 2:The price of the underlying asset ABC is 140 euros on expiry
The underlying has reached the upper limit(150 euros) during the life of the product • Underlying asset value on expiry:
140 euros• Return on the underlying: 40%• Value of the put Spread Plus on
expiry: 10 euros (the lower of: upperlimit minus underlying asset price(150 - 140) and the maximum gain)
• Investor’s profit/loss: -33% (-50 euros)
The underlying has not reached the upperlimit (150 euros) during the life of theproduct• Underlying asset value on expiry:
140 euros• Return on the underlying: 40%• Value of the put Spread Plus on
expiry: 20 euros (maximum gain)• Investor’s profit/loss: 33% (50 euros)
Situation 3:The price of the underlying asset ABC is 160 euros at maturity. The upper limit has
been passed.
• 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)
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: bull/bear strategy• Risk level: much higher than that of the
underlying (risk of total capitalloss)
• Investment horizon: short term• Valuation: relatively simple (intrinsic value)• Knock-out feature: yes, equal to the strike price• Trigger that alters the nature of the product: no• Option component: slight• Expiry date: yes• Legal form: certificate or warrant
Strategies/ProfileKnock-out products are highly leveraged, which means they are only suitable foractive investors who want to take a bull (call) or bear position (put) in order to profitfrom 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 thestrike price, divided by parity (for bull products) or the strike price minus theunderlying asset price, divided by parity (for bear products). These products are onlyaffected to a limited extent by the time value and volatility pattern of the underlyingasset. They require constant monitoring of the underlying asset price.
Leverageknock-out
A knock-out producttracks and substantiallyamplifies the performanceof an underlying asset inboth a bull and a bearmarket. However, if theunderlying reaches a predetermined limit orknock-out barrier (downward for a call,upward for a put), the product expires prematurely. Its valuebecomes zero. The investor loses thewhole of the investment.If, by contrast, the product matures withoutbeing knocked out, itsholder enjoys the samerights as with a plainvanilla warrant.
Please turn over
Leverage
With barrier
Profit
Loss Call Underlying Put
Knock-out
0
Sheet L 5
Situation 1:The underlying asset value is 110 euros. The knock-out barrier has not been reached• Underlying asset value: 110 euros• Return on the underlying: 4.76%• Value of the call warrant: 10.01 euros• Investor’s profit/loss: 99.40% (499 euros, or 100 times (10.01 - 5.02)
Situation 2: The underlying asset value is 103 euros. The knock-out barrier has not been reached• Underlying asset value: 103 euros• Return on the underlying: -1.90%• Value of the call warrant: 3.03 euros• Investor’s profit/loss: -39.60% (-199 euros, or 100 times (3.03 - 5.02))
Situation 3: The underlying asset value is 99 euros. The knock-out barrier has been reached• Underlying asset value: 99 euros• Return on the underlying: -5.70%• Product value: knocked out and settled• Settlement value: 0 euro• Investor’s profit/loss: -100% (-502 euros, or 100 times (0 - 5.02))
Leverageknock-out (continued)
ExampleBull market product with a
knock-out barrier and the
underlying asset ABC
• Initial underlying asset
value: 105 euros
• Knock-out: 100 euros
• Product value: 5.02 euros
• Parity: 1/1
The investor buys 100 call
warrants at 5.02 euros,
giving a total investment
of 502 eurosProfit
Loss Call Underlying Put
Knock-out
0
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: bull/bear strategy• Risk level: much higher than that of the
underlying (risk of total capital loss)• Investment horizon: from short to medium term,
depending on strategy• Valuation: relatively simple (intrinsic value)• Knock-out feature: yes, one that evolves over time• Strike price: yes, one that moves on a daily
basis• Trigger that alters the nature of the product: no• Option component: slight• Expiry date: no• Legal form: certificate or warrant
Strategies/ProfileKnock-out products are highly leveraged, which means they are only suitable foractive investors who want to take a bull (call) or bear position (put) in order to profitfrom movements in the underlying asset. It is relatively easy to value these products,provided that the knock-out barrier has not been reached. They are valued at theirintrinsic value, namely the underlying asset price minus the strike price, divided byparity (for bull products) or the strike price minus the underlying asset price, dividedby parity (for the bear products). If the knock-out barrier is reached, the productexpires prematurely. Its value is then zero. The investor can, however, receive acompensation payment (generally small), calculated according to each issuer’sprospectus terms.
Profit
Loss Call UnderlyingPut
0
Knock-out
Leverageknock-outwith strike
A knock-out product withstrike tracks and substantially amplifiesthe performance of theunderlying asset in both abull and a bear market, if the underlying is above(call) or below (put) apredetermined level. The product expires prematurely if that predetermined level is reached.
Please turn over
Leverage
With barrier
Sheet L 6
Situation 1:The underlying passes the barrier and the issuer unwinds at an average of 102.70euros.• Product is knocked out• Settlement of the product: 0.27 euro• Loss (0.27 - 2.01) = -1.74 euros or -86.57%• The loss on a direct investment in the underlying would have been 14.44%
Situation 2: The underlying does not reach the knock-out barrier at any stage and is worth 147 euros• Position is sold when the underlying asset value is 147 euros• Product value: 4.69 euros• Profit (4.69 - 2.01) = 2.68 euros or 133.33%• The profit on a direct investment in the underlying would have been 22.50%
Leverageknock-outwith strike (continued)
ExampleLeverage product with a
knock-out barrier and the
underlying asset ABC
• Initial underlying asset
value: 120 euros
• Strike price (or financing
level): 100 euros
• Knock-out barrier:
104 euros
• Parity: 10/1
The investor buys 10 products
at 2.01 euros
Profit
Loss Call UnderlyingPut
0
Knock-out
Characteristics• Continuous listing: yes• Entry/exit fees: no• Annual management fee: no• Parity: varies by product• Investment profile: movements in the underlying are
contained• Risk level: much higher than that of the
underlying (risk of total loss of capital)
• Investment horizon: short to medium term• Valuation: complex• Knock-out feature: yes, two• Trigger that alters the nature of the product: no• Option component: yes• Expiry date: yes• Legal form: certificate or warrant
Strategies/ProfileProducts with a double knock-out barrier offer very strong leverage and are onlysuitable for active investors who want to take a position in order to profit from abetter return than that of the underlying asset, movements of which are containedbetween two limits. The product has a fixed value on expiry, irrespective of wherethe underlying asset value ends up between the two limits. If either of the knock-outbarriers containing the underlying asset value is reached during the life of theproduct, the product expires prematurely with zero value.
Digital with doubleknock-outbarrier
Product with doubleknock-out barrier, thevalue of which on expiryis fixed in advance. The product expires prematurely if one of twopredetermined levels isreached during the product’s life.
Please turn over
Leverage
Digital with double knock-out
Profit
Loss Underlying Certificate
Knock-out barriers
0
Sheet L 7
Situation 1:The underlying has risen 25% on expiry• Underlying asset value: 125 euros• Product is knocked out• Settlement of the product: 0 euro• Investor’s loss: 100%
Situation 2: The underlying has not reached either knock-out barrier at any point and has fallen15%• Underlying asset value: 85 euros• Settlement of the product: 1 euro• Investor’s profit: 100%
Digital withdoubleknock-outbarrier (continued)
ExampleDigital product with a double
knock-out barrier and the
underlying asset ABC
• Initial underlying asset
value: 100 euros
• Lower knock-out barrier:
80 euros
• Upper knock-out barrier:
120 euros
• Settlement value: 1 euro
The investor buys 10 products
at 0.50 euro
Profit
Loss Underlying Certificate
Knock-out barriers
0