Whether it is food, sport, culture or clothing, people have their preferences. The same naturally applies to traders. When pursuing short-term returns, this type of investor likes to use leveraged products - and has clear preferences. More than 88,000 such instruments are listed on SIX Swiss Exchange. Around 60% of them are warrants. Mini-futures and knock-out warrants account for a further fifth and just under 14%, respectively. Now, something is happening in the smallest segment of the leveraged products market. Leonteq has begun launching Constant Leverage Certificates, rounding out a portfolio that already comprises more than 23,000 warrants, mini-futures and knock-out warrants.
Constant Leverage Certificates track the daily price movements of an underlying asset. As their name suggests, they replicate its performance using a constant leverage factor. Investors can take either a long position, based on the expectation that the price will rise, or a short position, based on the expectation that it will fall. This allows investors to establish targeted trading positions based on their assessment of the short-term performance of specific shares or indices. The principle is straightforward: if the underlying asset of a long Constant Leverage Certificate with a factor of 2 rises by 5%, the product increases in value by 10%. With the short version carrying the same factor, a 5% decline in the underlying generates a 10% gain over the course of the day. It is important to remember that leverage works in both directions. For example, if the underlying asset of a long Constant Leverage Certificate with a factor of 2 falls by 5%, the product loses 10% of its value. If the underlying asset does not perform as expected, substantial losses can occur, potentially resulting in a total loss.
The capital value represents the certificate's current overall value and determines how much an investor receives upon selling or exercising it. The product has an unlimited term and does not expire under normal circumstances. At its core, the capital value consists of two components. The first is the leverage component, which multiplies the underlying asset's daily price movement relative to the previous day's closing price by the constant leverage factor. The second is the financing or interest component, which reflects the capital required to finance the position or the proceeds from investing capital. Daily interest, costs and calculation fees have a small impact on the value each day. The leverage factor is kept constant through an automatic adjustment and compounding of the capital value. This daily compounding leads directly to one key characteristic: path dependency. Path dependency results from calculating the capital value based on daily performance. The relevant reference price is the underlying asset's price on each respective day. This calculation creates a chain of daily returns, meaning that not only the current reference price but also the path taken to reach it affects the result. Consequently, a Constant Leverage Certificate can lose value over time even if the underlying asset has moved sideways overall. The table illustrates this path dependency.
After two weak trading days, the underlying asset rebounds and fully recovers its previous losses. Nevertheless, on day five, the Constant Leverage Certificate remains significantly below its initial value. The product participates disproportionately in the two negative trading sessions and is therefore at a comparatively low level when the underlying begins to rebound. As a result, the underlying asset would have to rise disproportionately for the certificate to regain its initial value. In this example, that does not happen.
It is important to understand several other characteristics of Constant Leverage Certificates. First, for certain underlying assets, this structure includes a price threshold. For long products, this threshold lies significantly above the reference price; for short products, it lies correspondingly below it. If the underlying asset reaches or exceeds the threshold for a long product, or reaches or falls below it for a short product, no capital value is calculated for that trading day. In the event of exceptionally sharp market movements, the calculation is therefore deferred until the following day. Constant Leverage Certificates also incorporate an adjustment threshold to help mitigate the risk of a total loss. For long products, this threshold lies below the current reference price; for short products, it lies above it. Once the threshold is reached or crossed, an intraday adjustment takes place, and a new capital value is established. Suppose the underlying asset of a long Constant Leverage Certificate with a factor of 4 plunges by 25% during a trading day. In purely mathematical terms, the product's value would fall to zero. However, because the adjustment threshold is set 20% below the reference price, this does not happen. Instead, a new capital value is established for the product during the trading day. This mechanism does not change the fact that investors must be prepared for substantial losses, which may come close to a total loss.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.