Certificates

Derivatives (Certificates):

These derivatives are a kind of leveraged, future products, which can represent shares, raw materials, stock-indices or currency pairs.  The costs of the tradings with certificates is equal to stock-related costs, so commission for orders should be paid to our brokerage firm. The spread is also increasing our costs because we lost that amount according to the theoretical rate due to the difference of buying and selling price, but please do not forget that with stocks there is spread too, these are much wider in the case of a number of BÉT stocks than with certificates.
Certificates similarly to stocks are settled for T+3 and they appear as free liquid assets on our account as does money from the sale of certificates.

Warrants

They are derivatives, for which the investor has to form an expectation for the rate of the underlying product, whether it will increase or decrease and what rate it will reach or surpass by a certain point in future. So that way we have the opportunity to record a long or short position. The issuing bank determines more target prices and maturities to an underlying product. It is worthwhile to choose the longer maturity product, and it is also prudent when choosing a target price to consider the fundamentals, technical supports and resistances too. The rate of warrants follows the rate of the underlying products, but when it reaches the target price there could be a greater increase in the price of the warrant. In the aspect of risk it is more adventageous than normal futures positions, because in this case the losses are limited. After buying, the warrants behave like prompt securities, their rate either increases or deteriorates. They are unlike normal future positions, as it is not necessary to place any deposit if the rate moves against us.

Knock-out products

They are a kind of derivatives, for which an expectation has to be formed concerning the rate, namely what rate will not be reached by the underlying product. So that way we have the opportunity to record a long or short position.  The issuing banks defines several knock-out levels for an underlying product, at the selection of which fundamentals, technichal supports and resistances ought to be considered.
From a point of riskiness knock-out products are more advantageous than normal futures, since losses at the prior are limited. The rates of knock-out products follows that of the underlying product; however when the price of the underlying product reaches the knock-out level, the product ceases to exist. It goes into settlement, but we probably lose all the money we invested. It is important to note here, too, that the risk of losing more than the initial margin, like in futures trading, is not possible for knock-out products.

Advantages of Certificates:

Certificates can be created for almost all underlying products and expectations. They are not a managed product, so whatever product is behind it, it cannot over-achieve. Its rate always directly mirrors that of the underlying product. Lets assume that the objective of the certificate is to follow a stock index. Here the issuer promises the investor that the rate of the certificate is going to shadow precisely the changes in the index. The index-following certificate is extremely similar to an Investment Fund traded at the stock market, the only difference being that in the case of traded indeces the basket of goods has to actually be purchased, whereas in the case of certificates this is not specified.

Grouping of certificates:

Risk:

The riskiness of certificates depends on three things, namely:

• the type of the certificate, whether there is any investment guarantee and its leverage ratio
• the volatility of the underlying product
• the risk of the issuing institution

Certificates can have many types of risk, but the level of this is precalculable by only being able to lose the initial investment in the worst-case scenario. In the case of widely traded certificates there need not be an expectation of higher risk, than for other normal financial market products.

Duration:

Certificates can be issued with or without a duration. The settlement always takes place only after the fulfillment of its conditions, which can be specified as a period of time or as the occurrence of a certain event. Irrespective of duration, due to their tradability we can sell certificates on the market, as too, we can buy them.

Objective of investment

We can also group certificates according to what our exact intentions are concerning them; whether we wish only to carefully invest, or we specially intend to regularly speculate, that is frequently buy and sell. Summing up there are investment and trading certificates.

Types of Certificates:

As it is written above certificates can be created for all kinds of underlying products. However, certificates only carry a strong additional value, where the underlying products would otherwise be hard-to-reach for the investor. It might, for example, have a very specialized market.

Index Certificates:

Mapping stock, bond or commodity indeces is the most typical application of these certifcates. It is only worthwhile to invest in index certificates on the medium or long-run, if, of course we beleive that the value of the certificate is going to rise. It is a balnced, calm form of investment with an opportunity for endless profit and a limited risk of losing the invested sum.
Looking at an example to see how a product would work in real market conditions:
There exists a certificate mirroring a DIJA Index (leading US index), which is currently traded at $10. The DIJA Index is currently quoted at 12,000 points. Over the next week, the value of the index rises by 5%, to 12,600 points. In this case the rate of the certificate goes up accordingly, to $10.5. Next month DIJA falls to 11,400 points and the underlying certificate contracts to $9.5. It is clearly visible that the rate of the certificate strictly follows that of the index. Thus the investor need not spend hundreds of thousands of dollars to purchase the shares represented in an index, it is sufficient to purchase a certificate with the sum he wants to invest to reach the same investment objective.

Discount-certificates:

A discount-certificate allows the investor to purchase shares below their market price, but in return his profit potential from share price increase is capped. In other words: until the expiry of the certificate there is maximum potential profit set by the issuer. We are also compensated by not losing out for a certain margin of share prise decrease. This kind of certificate might be a good investment for side-stepping, uncertain, slightly growing market conditions.
Staying with the above example: apart from the 12,000 point DIJA Index, we also purchase a discount-certificate with 10% discount. This means that even if the market falls we do not register a loss above 10,800 points. Let’s assume a 1 year duration and peg the cap at 5%. After expiry there are three possible scenarios. If the index ends up below 10,800 we have a loss according to the ratio of 10,800 and the actual market rate. If the index closes between 10,800 and 12,600, we get our initial investment back and a return representing the ratio of the actual market price and 10,800 points. In case the index happens to rise to above 12,600 points by expiry, the returns for above 12,600 points are cashed in by the issuer. We still register a profit of 15% on our investment (10% discount profit and 5% yield).

Bonus certificates:

These certificates are also suitable for side-stepping market behaviour; however they do not cap profitability. How do they work? At issue a price level is established under current market prices and a bonus price level above it, which we receive at expiry even if the price of the underlying product never reaches this level. If the underlying poduct’s price is ever to fall under the established price level, the certificate loses its special nature and continues to operate as a simple index certificate for the rest of its duration. It is obvious that this type of certificate is profitable for good market spirits. Certificates being underlying products do not pay a dividend, so we make a good deal if the bonus exceeds the dividend for that share.
In practice this could happen like this: There could be a certificate issued for the 12,000 point DIJA Index with an established barrier of 10,800 and a bonus price level of 13,200 with a pre-specified time-limit, say 1.5 years. If in this 18 months the quotes of the DIJA Index never fall under the 10,800 barrier, then our returns will be paid out based on the 13,200 level.
If at expiry the index is quoted even higher, we get higher returns accordingly. If the barrier of 10,800 is broken, we get our returns based on the market rate of the index at expiry.

Guaranteed Certificate:

In this case, as its name suggests, the certificate bears no nominal risk of loss. If preserving the invested sum is attractive, even if at the price of capped profit opportunity, investment guaranteed certificates can be a good choice. This type of certificate should be suitable for small and inexperienced investors, or institutions interested in risk-reduction.
Let’s look at the way a guarantedd certificate works from the issuer’s point of view. The investor will need his money back in two years, he wants to have no risk of losing it and he would prefer some small yield, like 4%. The bank can offer the following solution:  Annual bank interest rates are at 10% and the issuer will need to pay 104% on the certificate in two years. So it is sufficient to deposit 86% of the initial investment in a bank account for it to pay with compound interest 104% at the end of year two. The remaining 14% can be put into higher-risk, leveraged certificates. If the high-risk investments fail, the 104% is still paid to the investor. However, if the higher-risk sum produces a good result, our investor can be given significant extra profit.

Parashute certificates:

They can be described as a combination of normal certificates and discount certificates. The certificates bear no loss for a smaller decrease in the price of the underlying product. For a greater decrease however, the certificates maturity pay-out decreases, too. There are different arrangements for loss-control; it is also possible to go one on one.
The certificates follow the price of the underlying product, or it is also possible for it to represent 70-80% of the increase whilst further decreasing the possibility of a loss. Normally suitable for an investor who trust there to be a moderate rise, but still requires a loss-control facility.

Turbo (knock out) certificates:

The term „turbo” is often used to describe something which is faster, or more dynamic than the standard version. With this instrument there is an increased profit or loss potential. When purchasing this, it is important to know the leverage ratio (the multiplier) which creates the turbo effect. If, for example, we use double leverage, for every one percent of increase in the underlying product’s price we make two percent for the certificate. But this holds for losses, too.

Over-achieving Certificates:

This can be described as the combination of a certificate mirroring securities and a turbo certificate. In this case there in a threshold, above which the turbo function kicks in, introducing leverages. Under this threshold the certificate simply mirrors the underlying product.
This instrument is suitable for any type of market-spirit (optimistic or pessimistic).

Transforming Certificates:

This type of certificates may not only deliver after settlement a yield to the investor, but also actual securities. However, it is the better case when the investor receives the cash; securities are normally received when the certificate produces a worse performance. But at least with a transforming certificate we get prolonged hope.