Investment Idea

5 points to check out knock-out warrants

21/12/2018 | 2 min read
Finnland Heady

The investor needs to understand the amount of risk involved in knock-out products. We provide you with useful tips and tricks to assess your choice of knock-out products.


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The investor needs to understand the amount of risk involved in investment products. It may also be worth trying to figure out the number of expenses because there are significant differences in costs between different service providers.

Knock-out warrants contain a high risk. If the target is a knock-out, the knock-out warrant is worthless. This is why the knock-out warrant is the more risk the closer the target knock level is. On the other hand, the leverage effect of the product is stronger, the closer the knock-out level is to the market value of the underlying asset.

The Knock-out level affects both the investor's return, the investor's expense, and the amount of risk invested by the investor. Therefore, a wide range of knock-out levels for the underlying asset is an investor's advantage. Vontobel offers a number of indexes, a wide spectrum of Finnish shares, knock-out warrants tied to currencies and raw materials at several knock-out levels. In addition to the range offered, the costs paid by the investor are also important. This will take account of the management costs charged by the movers in choosing the knock-out warrant.

  1.  Unlimited turbo and knock out warrants are the same things.

  2.  The liquidity of funds is easy to understand. It is calculated on the basis of invested capital.

    The key to understanding the running costs of the knock-out warrant is to perceive that it is a loan-bearing product. The loan is what it costs and the more it lends, the greater the costs. Unlike the funds, the running costs of a knock-out warrant are therefore tied to the amount of debt in the product, not the equity. The higher the proportion of the relative debt, the higher the share of the financial cost.

    In practice, the loan portion is the knock-out limit of the product. Loan costs are the costs that the investor pays in order to obtain a knock-out warrant leverage effect. Costs are added to the knock-out limit level daily.

    The Knock-out level corresponds to the amount of debt you are using and the lower the knock-out level you choose, the smaller the financial cost relative to your equity. However, the leverage effect you get is also lower. The higher the loan share, the higher the leverage effect. And the loan pays the money. This is why issuers lower their daily financial cost and increase it to knock-out the boundary.

    In the example above, both investors have virtually € 50 debts and therefore the same running cost. However, the cost for equity is different, because the amount of equity is different.

    The most important indicator when compared to the costs charged by different issuers is the financial spread. As noted above, the financial cost calculated for equity is not a comparable indicator because the relative proportion of equity varies.

    For example, on Vontobel's web site, you can find the financial cost as follows. First select the desired knock-out warrant and click on it.

    Then select "Product History" and click on a date. Essential are the financing spread and the reference interest rate.

    Debt is not free. With a holding time of more than a day, Unlimited turbo and knock-out warrants always include the cost of financial costs. This is despite the fact that there are consumer calculations for zero-day calculations based on one-day retention times for consumers. It is worthwhile to look at the financial expense.
  3. For some of the knock-out warrants tied to the Dax index, Vontobel was the cheapest with a 2.14 percent annual financing cost. The financing cost of Nordnet's knock-out warrants was 2.64 percent and Citygroup's 3.63 percent.

  4. In addition to running costs, the investor pays the difference between the purchase and the selling price, but this spread is typically only one cent. In addition, the investor pays the brokerage fees charged by the intermediary on the exchange trades.

    Knock-out warranties are high-risk products where the capital invested can lose completely. Therefore, smaller amounts are usually placed in them. As a result of the practice, the investor usually has to operate at fixed intermediation costs. Reimbursement costs may be affected in addition to the broker option, as it will buy a bit of each or more knock-out warrants.

    Reimbursement costs are also affected by a trading venue, as the foreign exchange often involves a higher brokerage cost. There are two things to do with the trading venue and the domicile of the issuer. Swiss Vontobel offers a very wide range of knock-out warrants that are traded specifically in Finland.

  5. Finally, it should be noted that the issuer's risk premium included in the price of the product is not constant, but may increase or decrease depending on the market situation. Knock-out warranties are non-deposit debt instruments. In relation to this counterparty risk, it is good to note that Vontobel's core capital ratio (19%) is clearly above the average for other European banks.

Important legal information

This bulletin is not a financial analysis, but a product ad. It therefore does not fulfill the statutory requirements to ensure the impartiality of the financial analysis and does not fall within the scope of the prohibition on trading prior to the financial analysis.

In order to obtain specific information on the structure and risks of investments in derivative contracts, future investors should read the brochure that is available in electronic form on the issuer's website at together with the final terms and the annexes to the brochure.

In addition, the brochure, its annexes and the final terms are free of charge in printed form from the registered office of the issuer:

Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Saksa.

Investors must take into account the current sales restrictions.

Companies belonging to the Vontobel Group may pay varying amounts of direct or indirect commissions to third parties (eg securities brokers) in the public domain and in connection with the sale of certificates. Additional information is available on request from your reseller partner.

This product advertisement may not be reproduced or distributed without special permission.