Bull & Bear certificates

The factor index reflects the movements of the benchmark, such as that of an equity or a share index, on a daily basis, and the price movements are intensified by the leverage (factor). Every closing price defines a new benchmark that in turn represents the basis for the price performance of the certificate on the following day. This daily adjustment makes it possible for the leverage to be held constant, which is why the investment is similar to a reinvestment on a daily basis.

Path dependency

Bull & Bear certificates are subject to strong price fluctuations. What is known as path dependency occurs because the reference price of the most recent index adjustment is always used to determine the value change of the benchmark. This means that although Bull & Bear certificates offer disproportionate profit opportunities, losses of the same proportion can occur because the leverage works in both directions.

Investors must be aware that a factor index can lose significant value when there are sideways phases even if the price of the benchmark has not really changed over the entire time period. The reason for this is that daily yields are leveraged and not the yields over a longer period of time. A simple, fictitious example shows exactly what this means:

• Purchase of a Bull & Bear certificate (long) with a factor of five on a factor index referring to the DAX® with an initial DAX® price level of EUR 100.00
• If the DAX® were to fall by 10 percent on the following day, the factor Index would lose 50 percent and would now have a price of 50 points
• If the DAX® were to recover to its original level on the following day – namely an increase of 11.11 percent (100/90-1) – then the factor index would not trade at 100 but only at 77.78 (50* (1+11,11%*5)).
• Consequently, the factor index would have lost 22.2 percent, although the price of the reference instrument would be traded at the original level.

5x long on the DAX® with an initial reference price of EUR 100

Therefore, Bull & Bear certificates are not suitable for a medium-term to long-term buy-and-hold strategy.

There can also be an intra-day index adjustment

As an example, we will assume that the price of the reference instrument falls by 10 percent within one day. As an investor in a Bull & Bear certificate with a 10x factor index related to this underlying, you would suffer a complete loss of the invested capital. To prevent this from happening, Bull & Bear certificates are provided with a price threshold that is similar to a barrier. It describes the maximum, permissible negative (long) or positive (short) price change of the benchmark compared to its last evaluation rate. An intra-day index adjustment is made if the benchmark has strong, unfavorable price movements and if its price falls below or exceeds the threshold. A new valuation rate is determined, and a new, assumed index calculation day begins. Measurements of ongoing daily performance of the benchmark are made on the basis of the new valuation rate.

This prevents the factor index from losing a large part of its value or its entire value within a very short time. However, it should be noted that an intra-day adjustment is equivalent to realizing the losses that have occurred, because further participation in the price changes of the benchmark now takes place from the new, lower level of the factor index (long) or from the higher level of the factor index (short). The threshold is a fixed percentage value of the valuation rate, and the threshold’s absolute value is determined on a daily basis.