Mini Future: How they work

Vontobel Markets
23 Oct 2023 | 4 minutes to read

Mini Futures provide investors with the opportunity to participate disproportionately, leveraging a smaller capital investment, in the price movement of an underlying asset. Long Mini Futures allow for betting on rising prices, while Short Mini Futures enable wagering on falling prices. These products have an unlimited term unless prematurely terminated by reaching the stop-loss level. Additionally, a wide range of asset classes such as stocks, indices, commodities, precious metals, interest instruments, currency pairs, and cryptocurrencies are available.

Mini Futures: How they work

Leveraging the effect of Mini Futures allows for an outsized participation in the performance of an underlying asset. Compared to a direct investment in the underlying asset, investing in a Mini Future requires a smaller capital outlay. The leverage arises from investors contributing only a fraction of the underlying asset's price, with the issuer financing the remaining portion.

A key component of Mini Futures is the stop-loss level. When the underlying asset reaches this barrier, a Mini Future expires automatically. Depending on the underlying asset's performance, a potential repayment amount may be returned to investors. Generally, the stop-loss level is adjusted monthly and additionally on days when the underlying asset trades "ex-dividend" (without entitlement to the last dividend) or without other distributions paid on the underlying asset.

The pricing of Mini Futures maintains high transparency as it is directly derived from the underlying asset's price. The so-called financing level describes the issuer-funded portion of the underlying asset. The intrinsic value of a Mini-Future is formed by the difference between the underlying asset's price and the financing level (base price). To determine the value of the Mini Future, the intrinsic value must ultimately be adjusted by the conversion ratio.

Payoff Mini Futures

Distinctive Aspects of Mini Futures

Through Mini Futures, investors can position themselves for both rising (Long) and falling (Short) prices of the underlying asset. Mini Futures do not have a fixed term (Open-End) and expire automatically if the underlying asset reaches the stop-loss level. Additionally, they can be terminated by the issuer with the notice period specified in the termsheet.

In comparison to other leveraged products like classic warrants and futures, Mini Futures possess intriguing attributes. Unlike classic warrants, volatility doesn't play a role. Furthermore, Mini Futures lack time value. Compared to classic futures, the maximum loss is limited to the capital investment, eliminating the possibility of margin calls with Mini Futures.

The risks of this product category should also be noted. The leverage effect can work in both directions, leading to outsized losses. While a residual amount can be paid to the investor in the event of a stop-loss occurrence, it depends on the underlying asset's performance. In an unfavorable scenario, Mini Futures could expire worthless. Thus, a complete loss of the capital investment is possible.

Costs of Mini Futures

Costs are incurred for financing the Mini Future up to the financing level. These costs are determined by the reference interest rate plus the current financing spread. These costs are passed on through the daily adjustment of the financing level, thus reducing the performance of the Mini Future.

Wide Range of Asset Classes

Mini Futures offer investors a broad selection of investable asset classes. Mini Futures are available for asset classes including stocks, indices, commodities, precious metals, interest instruments, currency pairs, and cryptocurrencies.

Portfolio Hedging with Mini Futures

Mini Futures can also be used to hedge existing security positions. In such cases, investors can safeguard against potential price declines or offset losses in existing security positions by using a Mini Future with an opposite market direction. This mechanism takes effect immediately after purchase and ends upon reaching the stop-loss levels determined by the underlying asset.

Pro and Con`s of Mini Futures

Advantages of Mini Futures

  •     Volatility does not play a role
  •     Lower capital investment compared to direct investment
  •     Disproportionate participation in rising and falling prices possible
  •     Transparent price formation
  •     Wide range of asset classes

Risks of Mini Futures

  •     Market risk of the underlying asset
  •     Leverage works in both directions
  •     Disproportionate loss, including potential total loss
  •     Issuer risk (risk of issuer default)
  •     Currency risk for underlying assets in foreign currencies


Why do Financing Levels and Stop-Loss Levels change?

As the issuer finances the main portion of the total investment up to the financing level / base price, investors are responsible for covering the financing costs. Due to the absence of a fixed term in Mini Futures, the financing costs cannot be transferred through a premium. Consequently, regular adjustments of the financing level occur. If investors hold a Mini Future overnight, the financing level or base price is adjusted by an amount equivalent to the financing costs. The financing level is adjusted daily, and the stop-loss level is adjusted at least monthly.

How do Mini Futures differ from classic exchange-traded futures contracts?

In contrast to classic futures, Mini Futures do not have a fixed term (Open-End). Additionally, Mini Futures feature a stop-loss level. Because of the stop-loss level, potential losses with Mini Futures are limited to the invested capital. On the other hand, traditional futures contracts involve margin calls in case of losses. Mini Futures are traded as securities on stock exchanges, while classic futures are traded on futures exchanges.

Can Mini Futures also be used as hedging instruments?

Indeed, Mini Futures can be suitable instruments to hedge portfolios against potential price losses or to offset losses in other positions. Being unaffected by changes in volatility, an equity index portfolio, for example, could be hedged using a Short Mini Future on the corresponding equity index. The hedge is effective immediately after purchase. It should be noted that the hedge is removed upon the Mini Future reaching its stop-loss level.

Key components of Mini Futures are the financing level and the stop-loss level. Do these factors change over time?

Both the financing level  and the stop-loss level are adjusted. However, there are differences in terms of frequency and rationale behind these adjustments.

The financing level is adjusted daily at the end of each adjustment day. An adjustment day is considered any day from Monday to Friday after the initial fixing day. The current financing level can be found on the respective product page. Daily adjustment notices are published under "Product History."

In practice, an adjustment of the financing level means an increase for Long and a reduction for Short products.

The stop-loss level is adjusted on the first adjustment day of each month and additionally on days when the underlying asset trades "ex-dividend" (without entitlement to the last dividend) or without other distributions paid on the underlying asset. At the discretion of the calculation entity, adjustments may be made on any adjustment day if deemed necessary. The current stop-loss level is determined using the current financing level and the current stop-loss buffer. The precise formula can be found in the conditions of the respective Mini Future, accessible through the product page. The current stop-loss barrier can also be viewed on the respective product page under "Product History."