Mini-Future Certificates combine the simplicity of open end certificates with the leverage effect of warrants. Mini-Future Certificates have no fixed expiration date. Due to the leverage nature of Mini-Future Certificates, their prices can move rapidly. It is therefore recommended to monitor them daily, even though they can be held over a longer period of time. These products are aimed at investors who are looking for tools to diversify their portfolio and they should not represent the entirety of a portfolio.

Advantages at a glance

• Leverage effect due to modest capital outlay
• Theoretically unlimited investment term
• Simple and transparent pricing
• Limited risk due to a built-in Stop-Loss Level
• None of the volatility effects associated with warrants
• No trading premium unlike warrants
• No margin payments or rollover risks that come with futures trading
• Can be applied to hedge existing positions

Disadvantages at a glance

• Early termination if the Stop-Loss Level is reached (Stop-Loss Event)
• Substantial risk of loss including risk of total loss of the capital outlay if the underlying moves in the wrong direction after a Stop-Loss Event (no capital protection)
• Currency risk if the Mini-Future Certificate is quoted in a different currency than the underlying asset
• Investors are exposed to the credit risk of the issuer and the guarantor

The leverage effect

With a conventional tracker certificate, investors pay the full price of the underlying and therefore participate completely in ist upside performance. With a Mini-Future Certificate, on the other hand, investors pay only a fraction of the price of the underlying. The remainder – known as the Financing Level – is paid by BNP Paribas. Put simply, BNP Paribas finances part of the cost of the underlying, which reduces the investor’s capital outlay. However, since the performance of the underlying is fully reflected in the investment, a leverage effect is created. The financing costs associated with this leveraged exposure are charged to the investor’s invested capital on a daily basis. Another advantage with Mini-Future Certificates is that they are open ended products, i.e. they have no fixed expiration date. However, the issuer has the right to terminate a Mini-Future Certificate by giving notice to the investors at least ten days prior to the targeted termination date.

The concept

Mini-Future Certificates are available in both long and short versions. Investors who expect the price of their chosen underlying to rise would buy a Mini-Long Certificate, those who anticipate a downward price trend would buy a Mini-Short Certificate. Since BNP Paribas provides full participation in the underlying‘s performance to the investor (subject to financing costs being charged to the investor), a leverage effect arises on the upside and also on the downside. The smaller the proportion of the underlying‘s value paid for by the investor, the greater the leverage effect and thus the extent to which movements in the price of the underlying are amplified by the Mini-Future Certificate. If, for example, the underlying gains 1%, the value of a Mini-Long Certificate with a leverage of five will rise by 5%. Likewise, a Mini-Future Certificate with a leverage of ten will show movements about ten times greater than those of the underlying (this is because the price of the Mini-Future Certificate is just 10% of the full value of the underlying as the other 90% is financed by BNP Paribas). The leverage effect amplifies the underlying’s price changes in both, rising and falling markets. This can be to the benefit or to the disadvantage of the investor. The higher the leverage, the more sensitive the Mini-Future Certificate reacts to changes in the price of the underlying. The maximum loss is always limited to the price paid for a Mini-Future Certificate.

The value of a Mini-Future Certificate, i.e. the capital outlay required from investors, is always equal to the difference between the price of the underlying and the Financing Level, with Conversion Rate and Ratio factored in where appropriate:

Value of Mini-Long = (Underlying – Financing Level) / Ratio x Conversion Rate

The leverage of a Mini-Future Certificate is thus calculated as follows:

Leverage of Mini-Long = Underlying / (Value of Mini-Long x Ratio) x Conversion rate

The Financing Level

The amount covered by BNP Paribas is called the Financing Level. The Financing Level of a Mini-Long is lower than the price of the underlying, whereas the Financing Level of a Mini-Short is higher. As with all leveraged products, investors have to pay financing costs. They do so in the case of a Mini-Future Certificate via a daily adjustment of the Financing Level. This means that the Financing Level does not remain constant throughout the life of the Mini-Future Certificate but is instead adjusted on a daily basis. It is therefore recommended that investors accurately manage their positions in order to balance actual costs and gains expected from their strategy. Please note: BNP Paribas can also charge the financing costs during the trading day, which means that day traders (who buy and sell their position within one trading day) may incur financing costs too. Changes in the Financing Level are determined by the following factors:

• The Market Rate in the currency of the underlying
• An Interest Rate Margin (Financing Spread) set by BNP Paribas
• Any dividends paid out on the underlying (Dividend Adjustment Amount)
• Rollover of the underlying futures contract (for Mini-Future Certificates on commodity futures)

Additional fees

Mark-up fee: The ask price of a Mini-Future Certificate is higher than its intrinsic value. The difference (”mark-up“) comprises a margin for the issuer and a protection against gap risks. The mark-up fee can be lowered or increased during the lifetime of the product, depending on the prevailing market conditions.

Bid/ask spread: The spread changes depending on the products, and can be expanded depending on the prevailing market conditions.

The Stop-Loss

Mini-Future Certificates incorporate a mechanism to prevent their value from falling below zero, which would trigger a margin call to cover the additional loss of the investment. This involves setting a Stop-Loss Level. If the value of the Mini-Future Certificate’s underlying falls below the Stop-Loss Level (for a Mini-Long) or rises above it (for a Mini-Short), the Mini-Future Certificate expires. The Stop-Loss Level is set relative to the Financing Level and includes a small buffer to ensure that the Financing Level is not breached. The Stop-Loss Level is adjusted on the first trading day of each month. The buffer is the difference between the Financing Level and the Stop-Loss Level and is set by BNP Paribas. SMI Mini-Future Certificates, for example, have a 2% buffer. Certain events such as rollovers of futures, dividend payments and other corporate actions may necessitate an exceptional adjustment of the Stop-Loss Level.

Calculating the residual value

If a Stop-Loss Event occurs, BNP Paribas unwinds its position and calculates the residual value of the Mini-Future Certificate, which is then credited to the investor within five bank working days. The residual value usually equals the difference between the Stop-Loss Level and the Financing Level. In exceptional cases, however, the residual value of a Mini-Future Certificate may deviate from this and, in especially unfavourable market conditions after the Stop-Loss Level has been triggered, may even be zero.

Different products for different risk profiles

To satisfy the different requirements of investors, Mini-Future Certificates are available with different Financing Levels, in the same way that warrants are available with different strikes.

Potential investment strategies

Mini-Future Certificates are available on a range of different underlyings and can be used in many different ways. The two main strategies are discussed below.

Speculation

Mini-Future Certificates may be suitable for investors who have a fixed view on the future price development of an underlying and want to boost their profit from this anticipated price development. Mini-Future Certificates enable investors to invest with leverage in different asset classes around the world in order to create a dynamic and diversified portfolio.

Hedging

As a basic principle, leverage products may be suitable for hedging existing portfolio positions. For instance, Mini-Short Certificates on the SMI or individual equities can be used to hedge equity positions. Currencies can also be hedged with Mini-Future Certificates.
Further information and examples on this topic can be found in our article on "Portfolio hedging" and in our product brochure. If you have any questions, please do not hesitate to contact us during our business hours on 058 212 68 50.