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FACTOR CERTIFICATES

Overview:

  • Gains can be realised when stock prices, indices or commodities increase or decrease;
  • Instrument with a fixed leverage;
  • Open-end instrument, i.e. no expiry date;
  • Instrument for active and experienced investors trading short-term.

 List of FACTOR certificates available on the WSE

 

Key parameters:

  • underlying – stock, commodity or index which on which the certificate "is based". Each factor certificate tracks the price changes of the underlying.
  • direction of investment:

o long certificate – the price of the certificate increases when the price of the underlying increases;

o short certificate – the price of the certificate increases when the price of the underlying decreases;
 

  • leverage – fixed for each certificate (e.g.: 2), determines the change in the price of the certificate in proportion to the change of the price of the underlying. For example, leverage 2 means that the price of the certificate changes by 20% if the price of the underlying changes by 10%.
  • price:

o daily changes in the price of the certificate directly reflect (subject to the leverage) daily changes in the price of the underlying. Returns on a longer term investment, however, are affected by a mechanism similar to compound interest.

o certificates are listed in PLN. The price of certificates whose underlying is denominated in other currencies is affected by the corresponding exchange rate.

o considering an investment for several (or several dozen) weeks, the investor should take into account the cost of financing which is included in the price of the certificate and slightly reduces the value of a long factor certificate.

  • protection level – protection level, e.g. 40% means that if the price of the underlying changes by 40% within one trading session (such that the investor incurs a loss), a safety mechanism will automatically be triggered to “cushion” further decrease of the price of the certificate (in practice reducing the leverage).

 

How does a long Factor certificate work?

In the example, the investor expects the WIG20 index to rise and buys a factor certificate with the following parameters:

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Scenario 1 – the market follows the investor’s expectations:

The gross return on the investment was 8.11% while the price of the underlying increased by 2.7%. Please note that the leverage determines the daily change of the factor certificate price. Investment over several days involves a mechanism similar to compound interest. Factor certificates are thus suitable for active investors who monitor their portfolios on an daily basis.

Scenario 2 – the market moves against investor’s expectations:

The gross loss on the investment was 7.11% while the price of the underlying decreased by 2.3%.

How does a short Factor certificate work?

In the example, an investor expects the price of gold to fall and buys a factor certificate with the following parameters:

Scenario 1 – the market follows the investor’s expectations:

The gross return on the investment was 3.43% while the price of the underlying decreased by 1.7%.

Scenario 2 – the market moves against investor’s expectations:

 

Pros and cons of factor certificates:

 

Disclaimer: Information on structured products is available in the Prospectus and the Final Terms. Before buying any type of structured products, investors should review the legal terms and the product structure described in those documents (they are available in the structured product search engine).

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