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Mini Futures

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Vontobel Markets
28/11/2022 | 6 min read
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Mini Futures offer investors the opportunity to participate disproportionately - with a leverage effect - in the performance of an underlying with a small capital investment. Long Mini Futures can be used to speculate on rising prices, while short mini futures can be used to speculate on falling prices. The products have an unlimited term, provided the product is not terminated by reaching the stop-loss level (or stop-loss barrier). In addition, a wide selection of underlyings is available, such as shares, indices, commodities, precious metals, interest rate instruments, currency pairs and cryptocurrencies.

How Mini Futures work

The leverage effect of Mini Futures makes it possible to participate disproportionately in the performance of an underlying. Compared with a direct investment in an underlying, an investment in a Mini Future requires a lower capital investment. The leveraged effect arises from the fact that investors only pay a fraction of the price of the underlying, while the issuer finances the remaining part. An important component of mini futures is the stop-loss level (also called the stop-loss barrier). If the underlying reaches this barrier, a mini future expires automatically, whereby a possible redemption amount can be paid back to investors depending on the performance of the underlying. Generally, the stop-loss level is adjusted monthly and additionally on the days on which the underlying is traded "ex dividend" (i.e., without dividends) or without other distributions paid on the underlying. 

The pricing of Mini Futures has a high degree of transparency, as the pricing can be calculated directly from the price of the underlying. The so-called financing level (also called strike) describes the share of the underlying financed by the issuer. The intrinsic value of a mini future can be formed by the difference between the price of the underlying and the financing level (strike).

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With the help of mini futures, investors can position themselves both on rising (long) and falling (short) prices of the underlying. Mini Futures do not have a fixed term (open-end) and expire automatically if the underlying reaches the stop-loss barrier. They can also be terminated by the issuer with the notice period specified in the terms and conditions.

Compared to other derivatives such as classic warrants and futures, Mini Futures have interesting characteristics. Unlike classic warrants, volatility plays no role. In addition, mini futures have no time value. Compared to classic futures, the maximum loss is limited to the capital invested, which means that mini futures are not subject to margin calls.

The risks of this product category should also be taken into account. The leverage effect can work in both directions and can thus also lead to disproportionate price losses. Although the investor may be paid a residual amount in the event of a stop-loss event, i.e., if the underlying reaches the barrier, this depends on the performance of the underlying. Mini Futures can also expire worthless if the performance of the underlying is unfavourable. A total loss of the capital invested is therefore possible.

Costs

Costs are incurred in the Mini Futures for financing the financing level (corresponding to the strike). 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 or the strike. They therefore reduce the performance of the Mini Future.

Wide choice of asset classes

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

Portfolio hedging

Mini Futures can also be used to hedge existing securities positions. In such a case, investors can protect themselves against a possible price decline or offset losses in existing securities positions with a mini future with the opposite market direction. This mechanism starts immediately after the purchase and ends when the underlying reaches the stop-loss barrier of the Mini Future.

Advantages

  • Volatility plays no role
  • Lower capital investment than with direct investment
  • Disproportionate participation in rising and falling prices possible
  • Transparent pricing
  • Broad selection of asset classes

Disadvantages

  • Market risk of the underlying
  • Leverage works in both directions
  • Disproportionate loss up to total loss possible
  • Issuer risk (default risk of the issuer)
  • Currency risk with underlyings in foreign currencies

FAQs

The price of the underlying has touched the stop-loss level - what happens now?

In the case of a Long Mini Future, the stop-loss barrier is always above the financing level / strike. If the price of the underlying has touched or fallen below the stop-loss barrier, trading in the Long Mini Future terminates. Due to the occurrence of this stop-loss event, the stop-loss reference price is used to determine the residual value of the product. If this relevant price is above the corresponding financing level / strike, a positive redemption amount results. However, it is possible for mini futures to expire worthless. The redemption amount is determined approximately one hour after the occurrence of the stop-loss event and subsequently published on the product page. 

How does the leverage effect work?

When investing in a Mini Futures, investors finance only part of the total investment. The main part is provided by the issuer. The leverage effect comes into effect because investors only have to pay part of the underlying, but participate in the entire movement of the price of the underlying.  The greater the difference between the price of the underlying and the financing level or strike, the lower the leverage. Mini Futures have the highest leverage if the underlying is already close to the stop-loss barrier. However, the amount of leverage is basically a timing consideration and changes with the change in the price of the underlying asset.

Why do the financing level (strike) and stop-loss level change?

Since the issuer finances the main part of the total investment in the amount of the financing level / strike, investors have to pay for the financing costs. Due to the lack of a fixed maturity date for Mini Futures, the financing costs cannot be transferred via a premium. For this reason, the financing level / strike and the stop-loss level are adjusted. If investors hold a Mini Future overnight, the financing level or strike is adjusted by an amount equal to the interest for financing the financing level. The financing level is adjusted daily as the strike price and the stop-loss level (stop-loss barrier) is adjusted monthly.

How do mini futures differ from classic, exchange-traded futures contracts?

Investment via Mini Futures differs from investment via classic futures contracts primarily by the existence of a stop-loss barrier and by the potentially unlimited term of mini futures. Due to the stop-loss barrier, potential losses with mini futures are limited to the invested capital. With classic futures contracts, on the other hand, there is a margin requirement in the event of a loss. Mini Futures are a type of warrant and are therefore traded as securities on securities exchanges or via brokers, whereas futures contracts do not fall under securities and are mainly traded on futures exchanges.

Are mini futures also suitable as a hedging instrument?

Mini Futures may well be a used as an instrument to hedge portfolios against potential price losses or to offset losses in other positions. Since they are not affected by changes in volatility, an equity index portfolio could, for example, be efficiently and cost-effectively hedged by a short Mini Future on the relevant equity index. The transaction costs are usually lower compared to selling the direct investment. Another advantage is that the hedge takes effect immediately after the purchase is completed. However, in the event of unfavourable performance of the underlying, there are the above-mentioned risks of loss, especially due to the leverage effect.

Important components of mini futures are the financing level or strike and the stop-loss level. Do these factors change over time?

Both financing level / strike and stop-loss level (stop-loss barrier) are adjusted. However, there are differences in the frequency and background of these adjustments.

The financing level is adjusted as the strike at the end of each adjustment day. An adjustment day is any day from Monday to Friday after the initial fixing day. The current financing level can be viewed as a base price on the respective product page. The daily adjustment notices are also published there under "Product history".

In practice, an adjustment of the financing level / strike means an increase of the financing level for long products and a reduction of the financing level for short products.

The stop-loss level will be adjusted on the first adjustment date of each month and additionally on those days on which the underlying is traded "ex dividend (i.e., without dividend)" or without other distributions paid on the underlying. At the discretion of the calculation agent of the product, an adjustment may be possible on any adjustment date, if required. The current stop-loss level is determined using the current financing level / strike and the current stop-loss buffer. The exact formula can be found in the terms and conditions for the relevant Mini Future, which are available via the product page. The current stop-loss barrier can also be viewed on the respective product page.