Trading with Gearing

Transcription

1 Trading with Gearing Societe Generale Exchange Traded Products JUNE 2011 Alexandre CHESSÉ Exchange Traded Products

2 2 Securitised Derivatives risk warning The products referred to in this presentation are Securitised Derivatives* which are suitable for sophisticated retail and professional investors in the UK, who have a good understanding of the underlying market and characteristics of Securitised Derivatives. In particular, it is important that an investor appreciates at the outset that they could lose all their capital when investing in these Securitised Derivatives. * A Securitised Derivative (SD) is a security listed on the London Stock Exchange and issued by a bank via an Issuing Programme which is approved by the UK Listing Authority. Final Terms are published for each SD which provide investors with its characteristics. The product features given in the Final Terms are prescribed by the approved Issuing Programme.

3 Introducing Société Générale 3 83 countries, 157,000 employees, 128 nationalities and over 32 million customers Focused on three core businesses: French Networks International Retail Banking Corporate and Investment Banking

4 Corporate & Investment banking 4 Nearly 11,000 employees in 33 countries serving companies, institutions and investors Global markets: number one in equity derivatives worldwide, and leading positions in fixed income, commodities and research Over 20 years of experience in Exchange Traded Products Globally Introduced Exchange Traded Products to the UK in 2002 Now over 1,000 products offered in the UK, catering for practically any investment objective

5 Exchange Traded Products 5 ETPs are listed on the London Stock Exchange Two layers of regulation, from the FSA and the exchange Buying and selling prices available throughout every trading day; prices easy to track You buy and sell ETPs through your stockbroker in the same way as ordinary shares You do not need any form of special account need to pass the appropriateness test with your stockbroker Nearly all major firms of ETPs will deal in covered warrants Same dealing charges as for shares No stamp duty on purchases* The tax statement is only a general guide. The tax treatment of investments will depend on an individual s circumstances. If investors are in any doubt as to their tax position, they must consult with an appropriate professional tax adviser. This statement of the UK tax treatment of the product is based on our understanding of the laws and practice in force as of the date of this document and is subject to any changes in law and the interpretation and application thereof, which changes could be made with retroactive effect

6 The range of short term Exchange Traded Products 6 Currencies Currencies

7 Covered Warrants 7

8 Covered Warrants are a big market in Europe 8 Covered warrants listed in London since 2002, and in Europe for far longer Issued by SG and by other banks Turnover of Covered Warrants in 2010 on the London Stock Exchange 322mio Turnover of Covered Warrants in 2010 on Euronext Paris 3.889bio UK Covered Warrants market growth Monthly Warrant listings UK & Europe 1,046 Warrants listed on Euronext Paris in May 2011 Warrants listed on the LSE in May ,000 Sources: and June 2011

9 What are Covered Warrants? 9 With over 800 currently in the range, Covered warrants allow you to take an investment position on a broad range of large, liquid assets and even some less liquid: Market indices FTSE 100/250, DAX, CAC 40, Dow Jones, S&P 500, Nasdaq 100, Nikkei 225, Eurostoxx 50, HSCEI. Individual stocks Apple, AstraZeneca, BP, Barclays, Google, HSBC, Prudential, Tesco, Vodafone, Xstrata. Commodities Aluminium, copper, corn, gold, oil, palladium, platinum, silver, wheat. Foreign Exchange EUR/USD, GBP/CAD, GBP/CHF, GBP/EUR, GBP/JPY, GBP/USD, USD/JPY. They are very similar to options Covered warrant purchase price is the maximum potential loss Listed on the London Stock Exchange and trade like a share during market hours Covered Warrants have a fixed term of between 3 months and 5 years Automatically cash settled at maturity so no physical delivery There are two main types: Call Covered Warrants for rising markets Put Covered Warrants for falling markets (source: SG)

10 Key terms for Covered Warrants trading 10 Type Strike Price EPIC Call FTSE 100 5,100 17Jun11 SC54 Underlying Maturity TERM Underlying: Type: Maturity: Strike Price: EPIC: Parity: Delta: DESCRIPTION UK or US single Stock, Index, Commodity or FX Call or Put Covered Warrant The date that the warrant expires - between 3 months & 5 years The level taken at maturity to calculate the redemption value The unique code used to identify the product with your stock broker Number of warrants required to get exposure over one underlying The sensitivity of the Covered Warrant price to the Underlying price

11 Why Covered Warrants? GEARING Covered warrants enable investors to gain exposure to the performance of an underlying asset for a fraction of the price of a direct investment This GEARING means that Covered Warrants amplify the rise or fall of the underlying asset. For example: ABC Call Covered Warrant: ABC Share price 100p; ABC Call Covered Warrant: Strike Price of 80p; Warrant price 25p ABC Share price gains 10% to 110p; ABC Call warrant rises 10p in price to 35p a 40% rise The gearing can work against the investor as well Losses are magnified as well as gains BUT investors cannot lose more than they invest - no margin calls This is an advantage over CFDs and spread betting Covered Warrant Price Underlying Asset Price Source: SG Listed Products. This is not a recommendation. For Illustrative purposes only

12 12 Choosing a Covered Warrant Source: SG Listed Products. This is not a recommendation. For Illustrative purposes only 1. Define a scenario with a time frame (assuming the FTSE 100 is at 5,696.69*) The FTSE100 will gain 300 points in 1month 2. Select the covered warrant We have chosen SX76 FTSE100 call covered warrant maturity in 3 6 months Strike 5,600 Delta 54.7 % The EPIC Code Product Name Expiry Date Price the underlying must rise above The sensitivity of the Covered Warrant to a 1 point change in the Underlying Asset *Level of the FTSE 100 Index as at 16/06/2011

13 Simulating the Trade Source: SG Listed Products. This is not a recommendation. For Illustrative purposes only Using the simulator Enter the expected Underlying Level & Date SX76 was purchased at on 17/06/11 for a 5, The following shows the potential outcome: Source: Underlying level in one month* up 300 points stays the same Down 300 points FTSE100 Level 5, , , Observation Date: 17/07/ /06/ /06/2011 % Change in Covered Warrant price % increase % decrease % decrease Covered Warrant Premium Both gains and losses are amplified. The figures relating to simulated future performance are a forecast and not a reliable guide to actual future performance.

14 Covered Warrants Pricing 14 Pricing is more complex in reality than in the simple examples given Covered warrant prices generally have two components Intrinsic value (sometimes) Time value The intrinsic value is the difference between the strike price and the price of the underlying asset If a warrant has intrinsic value, it is said to be in the money If the strike price and underlying are equal, the warrant is at the money If a warrant has no intrinsic value, it is out of the money For call warrants the underlying price must be above the strike price to be in the money and vice-versa for a put warrant Share price 100p; call warrant strike price 70p; intrinsic value 30p Share price 100p; put warrant strike price 140p; intrinsic value 40p

15 Time value 15 The time value, or premium, is the element of the price paid for the potential for the Covered Warrant to move into the money between now and expiry As the final exercise date approaches, the time value diminishes because there is less time for the warrant to accumulate profit This is known as time value erosion As a result, longer-dated warrants are more expensive than short-dated ones Time value is also influenced by volatility, interest rates, and dividends Covered warrant prices are maintained by the issuer and are NOT determined by supply and demand Time value will be zero when the warrant expires

16 16 Risks of Covered Warrants Capital at Risk: Investors capital is fully at risk. Counterparty Risk: Any failure of Société Générale Acceptance to perform obligations when due may result in the loss of all or part of an investment. Underlying Risk: Underlying indices may be complex and volatile Liquidity Risk: Société Générale. Is the only market maker for Covered Warrants and therefore the only liquidity provider. Leveraged returns: If a covered warrant s underlying instrument moves against you, the losses incurred by the covered warrant will be greater in percentage terms than those incurred by the underlying itself. Limited Life: Covered warrants have a limited life, as denoted by the expiry date of each issue. After this date, covered warrants can no longer be traded or exercised Benefits of Covered Warrants Gearing / Leverage - Ability to make higher proportionate returns from a positive or negative move in the market (Note: gearing can magnify losses as well as gains) Limited risk - Capital is fully at risk but you can t lose more than you invested Transparency- Live prices on the London Stock Exchange throughout the trading day under normal conditions Buy or sell through your stockbroker in the same way as trading a share A gearing of 5x on a financial product means that when the underlying moves 1%, the price of the product moves 5%

17 Turbos 17

18 What are Turbos? 18 Similar to Covered warrants, Turbos provide Geared exposure to an underlying: Market indices FTSE 100 Index DAX Index Euro STOXX 50 Foreign Exchange GBP/USD EUR/GBP GBP/JPY Listed on the London Stock Exchange and trade like a share during market hours Covered Warrants have a fixed term of between 3 and 12 months Automatically cash settled at maturity so no physical delivery There are two types: Long Turbos for rising markets Short Turbos for falling markets

19 Key terms for Turbos trading 19 Type Strike / KO EPIC Long ABCIndex 5,500 16Dec11 TABC Underlying Maturity TERM Underlying: Type: Maturity: Strike Price: KO: EPIC: Parity: DESCRIPTION UK or US single Stock, Index, Commodity or FX Long or Short Turbo The date that the Turbo expires if it doesn t knock out early The level taken at maturity to calculate the redemption value The level at which the Turbo expires immediately worthless if hit intraday The unique code used to identify the product with your stock broker Number of Turbos required to get exposure over one underlying

20 20 An example trade: T351 This is not a recommendation. For Illustrative purposes only The FTSE 100 Index is down by 6.94% Vs the high of 6, on the 8 th Feb 2011 Investor believes that the FTSE 100 will recover before the Turbo expires on 16 th Dec, 2011 They are comfortable with the risk that if the FTSE 100 Index touches 5,200 the Turbo will knock out and they will lose 100% of their capital Turbo Example: LONG Turbo T351* 5 year performance of the FTSE 100 Index Strike / Knock out level Time Knocked Out Source Bloomberg, 20 th June Past performance is not a reliable indicator of future performance Description Details Price Current Index Level 5,673pts Underlying FTSE 100 Index Parity 1000/1 Strike Level 5,200 Effective Gearing Knock-Out level 5,200 Expiry Date 16 December 2011 *As at 20/06/ :15:00 All price data is indicative Gearing of 12 means that a 1% recovery in the FTSE 100 Index would equate to approximately 12% rise in the Turbo A fall of 1% for the FTSE 100 Index would equal a 12% fall in the Turbo If the FTSE 100 Index hits 5,200 the Turbo will knock out and the investment expires worthless

21 21 Risks of Turbos Capital at Risk: Investors capital is fully at risk. Counterparty Risk: Any failure of Société Générale Acceptance to perform obligations when due may result in the loss of all or part of an investment. Underlying Risk: Underlying indices may be complex and volatile Liquidity Risk: Société Générale. Is the only market maker for FX Turbos and therefore the only liquidity provider. Leveraged returns: If a Turbo s underlying instrument moves against you, the losses incurred by the Turbo will be greater in percentage terms than those incurred by the underlying itself. Benefits of Turbos Gearing / Leverage - Ability to make higher proportionate returns from a positive or negative move in the market (Note: gearing can magnify losses as well as gains) Transparency- Live prices on the London Stock Exchange throughout the trading day under normal conditions Knock out feature limits risk - Capital is fully at risk but you can t lose more than you invested Simple straightforward payout at maturity Flexibility - Buy or sell through your stockbroker in the same way as trading a share Limited Life: Turbos have a limited life, as denoted by the expiry date of each issue. After this date, Turbos can no longer be traded or exercised

22 NEW: Super10s 22

23 23 Simplify your view with Super 10 s Fixed term investment products that pay either 10 at maturity after 3 to 6 months, or nothing Simply decide if the FTSE 100 will: Stay-High stay above the Barrier Level Stay-Low stay below the Barrier Level Range stay within an Upper and Lower Barrier level throughout the investment term Fixed risk; you can t lose more than you invest but capital is fully at risk Lower Barrier Upper Barrier EPIC Type FTSE LEVEL Level Level Maturity BID ASK SU03 Range 5,673 5,400 6, Sep SU04 Range 5,673 5,400 6, Sep SU16 Stay High 5,673 5, Sep SU14 Stay High 5,673 5, Dec SU21 Stay Low 5,673 6, Sep SU24 Stay Low 5,673 6, Sep All price data is indicative Source SG as at 20/06/2011

24 Example a Stay Low Super10s This is not a recommendation. For Illustrative purposes only 24 Stay High Super10s are designed for the investor who believes that the FTSE 100 will stay high throughout the Investment Term Scenario 1: The FTSE 100 remains below 6,100 throughout the Investment Term. On the Expiry Date, the investor will receive 10 for every unit purchased. Based on a purchase price of 3.42 per unit, your profit is % Scenario 2: The FTSE 100 Index touches 6,100 at any point The Super10 immediately expires and the investor loses their investment. All price data is indicative Source SG as at 17/06/2011 Description Detail Underlying FTSE 100 Asset Index Lower Barrier Level 6,100 Expiry Date 3 months Cost per unit at 3.42 per issue unit FTSE 100 level at issue 5,800 Payout on the Expiry Date Source: SG Listed Products. This is not a recommendation. For Illustrative purposes only

25 Example Range Super10s This is not a recommendation. For Illustrative purposes only 25 Range Super10s are designed for the investor who believes that the FTSE 100 will stay within a specific range throughout the Investment Term Scenario 1: The FTSE 100 remains above 5,400 and below 6,200 throughout the Investment Term. On the Expiry Date, the investor will receive 10 for every unit purchased. Based on a purchase price of 2.98 per unit, your profit is %% Scenario 2: The FTSE 100 Index touches either 5,400 or 6,200 at any point The Super10 immediately expires and the investor loses their investment. Description Detail Underlying FTSE 100 Asset Index Upper Barrier Level 6,200 Lower Barrier Level 5,400 Expiry Date 3 months Cost per unit at 2.98 per issue unit FTSE 100 level at issue 5,800 Payout on the Expiry Date Source: SG Listed Products. This is not a recommendation. For Illustrative purposes only All price data is indicative Source SG as at 17/06/2011

26 Example a Stay High Super10s This is not a recommendation. For Illustrative purposes only 26 Stay High Super10s are designed for the investor who believes that the FTSE 100 will stay low throughout the Investment Term Scenario 1: The FTSE 100 remains above 5,600 throughout the Investment Term. On the Expiry Date, the investor will receive 10 for every unit purchased. Based on a purchase price of 5.53 per unit, your profit is 80.73% Scenario 2: The FTSE 100 Index touches 5,600 at any point The Super10 immediately expires and the investor loses their investment. Description Detail Underlying FTSE 100 Asset Index Lower Barrier Level 5,600 Expiry Date 3 months Cost per unit at 5.53 per issue unit FTSE level at issue 5,800 Payout on the Expiry Date Source: SG Listed Products. This is not a recommendation. For Illustrative purposes only All price data is indicative Source SG as at 17/06/2011

27 27 Risks of Super10s Counterparty Risk Any failure by Société Générale Acceptance N.V. as Issuer, or by Société Générale as Guarantor, to make payments due under the Super10 may result in the loss of all or part of your investment. Capital at Risk The product will expire worthless if the Barrier Level is ever touched or exceeded during the Investment Term. You cannot lose more than you have invested Underlying Risk The Underlying Assets may be complex and subject to fluctuation Liquidity Risk / Early Sale Risk Société Générale. Is the only market maker for Covered Warrants and therefore the only liquidity provider... Benefits of Super10s Fixed payout Potential for a high fixed return based on the future price of the Underlying Asset remaining within a specific range Fixed risk You cannot lose more than you invest Simple structure pays either 10 or 0 per unit Transparency Listed on the London Stock Exchange with live pricing during market hours Flexibility Traded like a share during normal market hours through your existing stockbroker account

28 Understanding the different short term products 28 Covered Warrants Turbos Super10s Objective Provides gearing for speculative or hedging strategies Provides gearing for speculative or hedging strategies, with a knockout feature Generates a fixed return; either 10 or 0, providing the Underlying does not touch a pre-defined Barrier Level Structure Standard Call and Put options SG is the liquidity provider Long and Short Turbos SG is the liquidity provider Either stay-high, stay-low or within a range SG is the liquidity provider Range Calls and Puts on: - UK Shares and Indices - Foreign Indices - Currency pairs - Hard and soft commodities - Lyxor ETFs Sector Indices Long and Short on: - FTSE 100 -DAX - Eurostoxx 50 Stay High, Stay Low and Range on - FTSE 100 Risks - Capital is at risk if the underlying closes below (call) or above (put) the strike price at expiry - Counterparty risk on Société Générale - The underlying may be volatile - Capital is at risk if the underlying hits the knock-out barrier - Counterparty risk on Société Générale - The underlying may be volatile - Capital is at risk if the Underlying hits a Barrier Level at any point in the Investment Term - Counterparty risk on Société Générale

29 How can you use Gearing in your portfolio 29 Trading + Amplify returns from a rising or falling market - Gearing can work against you Hedging + Use Puts / short turbos to protect portfolio returns from a falling underlying value - Calculating a perfect hedge maybe complicated Cash Extraction + Use leverage defensively to gain equivalent exposure as a direct investment for less capital - Covered Warrants and Turbos do not pay dividends

30 30 Services and Support Website Complimentary seminars Weekly newsletter Précis Weekly/ Daily Technical Analysis Horizon magazine

31 General risks 31 Capital at Risk: ETNs/Trackers are tracking instruments: their risk profile is similar to a direct investment in the underlying. Investors capital is fully at risk and you may not get back the amount you originally invested. We recommend that retail investors consult their own independent professional advisors prior to investing. Underlying Risk: The underlying indices may be complex and volatile. Counterparty Risk: ETNs are issued by Société Générale Effekten and Trackers and Covered Warrants by Société Générale Acceptance, each member of the SOCIETE GENERALE group of companies. Any failure of the relevant SOCIETE GENERALE group issuer to perform obligations when due may result in the loss of all or part of an investment. Liquidity Risk - Société Générale is the only market-maker for SG ETNs and Trackers and therefore the only liquidity provider. On-exchange liquidity may be limited as a result of a suspension in the underlying market represented by the index tracked by the product; a failure in the LSE, Société Générale systems; or an abnormal trading situation or event. Specific Covered Warrants Risk Factors Capital Risk: Before maturity, investors should note that covered warrants experience time decay (erosion of their time value) throughout their life. The rate of this decay accelerates as covered warrants near expiry and covered warrants may expire worthless. You should not buy a covered warrant unless you are prepared to lose all of the money you have invested plus any commission on transaction charges. It is important to note that while changes in the underlying price are generally the most important factor for covered warrants, other variables - such as market volatility, interest rates, exchange rates and dividends - may lead to a change in the price of a covered warrant even if the underlying itself is unchanged or moves in your favour. Leveraged returns: Leveraged returns are a major advantage of covered warrants but can also work against investors. Covered warrant investors should be aware that, if the covered warrant s underlying instrument moves in the opposite direction to that anticipated by investors, the losses incurred by the covered warrant will be greater in percentage terms than those incurred by the underlying itself. The prices of covered warrants can therefore be volatile. Limited Life: Covered warrants have a limited life, as denoted by the expiry date of each issue. After this date, covered warrants can no longer be traded or exercised Secondary Market Investors can buy or sell ETNs at any time in the secondary market prior to the Exercise Date on any regular trading day from 8.15am to 4.30pm. The value of the ETN will vary on an intraday basis. Société Générale is the only market-maker and therefore the only liquidity provider for all SG Listed securities. Société Générale will refresh the prices throughout the trading day according to LSE rules. The liquidity offered is monitored by the LSE monitoring team, both in terms of spreads and sizes. Cases in which there is no guarantee that liquidity or live prices will be available on the secondary market includes where: the underlying asset level is suspended or not tradable; there is a failure in the LSE or Société Générale systems; abnormal trading situations e.g. sudden and sharp volatility increase or lack of liquidity in the underlying. This means that an investor may find it difficult or impossible in certain circumstances to sell the Securitised Derivative or maybe offered a price less than they paid for it

32 Important Information 32 This seminar is intended for educational purposes only and as such is not a solicitation or recommendation to make an investment based on the contents of this presentation. This document is issued in the UK by the London Branch of Société Générale. Société Générale is a French credit institution (bank) authorized by the Autorité de Contrôle Prudentiel (the French Prudential Control Authority). Société Générale is subject to limited regulation by the Financial Services Authority in the UK. Details of the extent of our regulation by the Financial Services Authority are available from us on request. Although information contained herein is from sources believed to be reliable, Société Générale makes no representation or warranty regarding the accuracy of any information. Any reproduction, disclosure or dissemination of these materials is prohibited. The products described within this document are not suitable for everyone. Investors capital is at risk. Investors should not deal in these product unless they understand their nature and the extent of their exposure to risk. The value of the products can go down as well as up and can be subject to volatility due to factors such as Level changes in the underlying instrument and interest rates. Prior to any investment in these products, you should make your own appraisal of the risks from a financial, legal and tax perspective, without relying exclusively on the information provided by us, both in this document and the Pricing Supplement of the product available on the website We recommend that you consult your own independent professional advisors. Investors should note that holdings in these products will not be covered by the provisions of the Financial Services Compensation Scheme, nor by any similar scheme. The securities can be neither offered in nor transferred to the United States. The tax statement is only a general guide. The tax treatment of investments will depend on an individual s circumstances. If investors are in any doubt as to their tax position, they must consult with an appropriate professional tax adviser. This statement of the UK tax treatment of the product is based on our understanding of the laws and practice in force as of the date of this document and is subject to any changes in law and the interpretation and application thereof, which changes could be made with retroactive effect. There is a risk that any failure by a member of the SOCIETE GENERALE group of companies to perform obligations when due may result in the loss of all or part of an investment. The investor still ultimately bears a credit risk on Societe Generale. For more information: see the Terms and Conditions available on our website