LISTED PRODUCTS FIXED RISK AN INTRODUCTION TO FIXED RISK TRADING Covered Warrants, turbos & super10s
RISK WaRNINg CONTENTS Covered Warrants, Turbos and Super10s are Securitised Derivatives* suitable for UK sophisticated retail and professional investors who have a good understanding of the underlying market and product characteristics. In particular, it is important that the investor appreciates at the outset that he/she could lose all his/her invested capital when investing in this product, even if it is held until the end of its Investment Term. Covered Warrants, Turbos and Super10s are issued by Societe Generale Acceptance. If Societe Generale Acceptance were to fail to make payments due, you could lose some or all of your investment. *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 and its pay-off at maturity. The product features given in the Final Terms are prescribed by the approved Issuing Programme. 3 An introduction to fixed risk trading 4 Won t stop losses fix my risk? 5 Fix your risk while leveraging your returns 6 Take a simple view on the markets with Super10s 8 Leverage short term trading opportunities with Turbos 11 Covered Warrants: Extend your view not your risk 16 How do these products compare with Spread Bets? 16 Easy to trade like a share in your stockbroking account 18 What are the risks? 19 Golden rules for trading listed products 20 Societe Generale, a world leader in listed products 21 Glossary of terms 2 24
an INTRODUCTION TO FIXED RISK TRaDINg With interest rates low, inflation high, and equity market returns hard to find, it is no wonder that investors are turning to leveraged products for the chance to enhance portfolio returns. But in the case of CFDs and Spread Bets, this promise of enhanced returns can come at the expense of unlimited losses. Many investors aren t prepared to take this risk and if you fall into this camp, you might be interested to know that you can take advantage of leveraged trading without risking more than you invest, and you can do it simply with our range of Covered Warrants, Turbos and Super10s. What is leverage? Trading on leverage means taking exposure to an underlying equity, index, commodity or currency pair for a fraction of the cost of buying the asset outright. A residential mortgage is similar in that you can buy a house worth 200,000 with just a 40k deposit. Theoretically, if your house increases in value by 10% to 220,000 your capital is worth 60,000, an increase of 50% on your initial investment. Importantly, leverage also works against you, and if the house falls in value to 180,000, your equity would halve to 20,000. the importance of fixing your risk Our mortgage example can also be used to demonstrate the dangers of certain types of leveraged product, such as Spread Bets and CFDs where you can potentially lose more than you invest. If your 200,000 house actually fell by 25% it would be worth just 150,000. Selling now would mean that theoretically, you not only lose your entire deposit of 40,000, but you have to find an extra 10,000 to repay the loan. In the world of spread betting and CFDs this situation is a real possibility, and should it happen you would receive a Margin Call, asking you to deposit more funds to cover the loss. With markets as volatile as they have been in the last 12 months, and the ability to leverage your exposure by up to 100 times, it is easy to see how traders can quickly find themselves in a very difficult position. The good news is that not all leveraged products work this way. With Covered Warrants, Turbos and Super10s, you can enhance your potential returns in rising, falling or flat markets, and your maximum loss is always limited to the amount you invest. This means that you can take on the markets, safe in the knowledge that no matter what happens, your losses will never exceed your investment. example of a residential mortgage where the property is originally purchased for 200,000 with a 40,000 deposit Change in house price House price Invested capital profit / loss scenario a Increases 10% 220,000 60,000 50% scenario b Increases 25% 250,000 90,000 125% scenario C Falls 10% 180,000 20,000-50% scenario d Falls 25% 150,000-10,000-125% For illustrative purposes only. This is not a recommendation. Source SG Listed Products. 3 24
WON T STOp LOSSES FIX my RISK? It is true that if you are trading CFDs or Spread Bets, stop losses can safeguard your trading account from unlimited losses. Setting a stop loss level which will automatically close your trading position if the Underlying Asset goes against it is certainly a sensible risk management tool, but it is not a foolproof strategy. Take for example a long trade on the FTSE 100 placed on the 11th November 2011 when the FTSE was trading at 5545.38 before it began a 9 day fall which ended at 5127.57*. A trader enters a 5 per point trade in the expectation of a rise in the price of the FTSE 100 Index. With a 1% margin required, the trader opens the trade with an initial stake of 277.27. If this trade was placed without a stop loss the subsequent 7.53%* fall could have proved devastating to their portfolio. This 418 point fall would have translated into a loss of 2,089.05, and the trader would have had to raise an additional 1,811.78 to cover the cost of their loss. However, if the trader had placed a stop loss at 5,495.38, 50 points below the starting value of the FTSE 100 the result would have been different. However, this still may not be a perfect strategy and there are several ways that the trade could have gone: scenario a: The stop loss would be an effective risk management tool if the FTSE subsequently began a sustained downward trend. As soon as the price ticks to 5,495.38, the trade would terminate, and the trader s loss would be limited to 250 (50 points x 5 per point). However, there are a couple of circumstances where the stop loss may not be so effective. scenario b: The index gaps down In most cases, stop loss levels are not guaranteed, and if the FTSE 100 was to open down at 5,445.38, or fall so quickly that the next price was quoted at 5,445.38, the stop loss would trigger at this level and not 5,495.38. So the actual loss incurred by the trader is 500: (100 points x 5 per point), and not the fixed loss of 250 they expected. scenario C: The index recovers The FTSE actually recovered 401.64 points* between the 24th November 2011 and the 9th December 2012. Because the stop loss triggered at 5,495.38, the trader lost their position and could not take advantage of the subsequent 401.64 point rise in the FTSE 100*. From the above example, the two main disadvantages of using stop losses to fix your risk are: 1. Highly volatile and unexpected movements in the market could result in some market-makers pricing at a level below the stop loss barrier, meaning your losses are never precisely fixed. 2. If the markets recover, you will have lost out on the opportunity to also recover your losses. an illustrative spread bet trade on the Ftse 100 6400 6200 6000 5800 5600 Stop Loss Fall begins Lowest point Rise ends 5400 5200 5000 4800 9/2/11 9/3/11 9/4/11 9/5/11 9/6/11 9/7/11 9/8/11 9/9/11 9/10/11 9/11/11 9/12/11 9/1/12 9/2/12 For illustrative purposes only. This is not a recommendation. Past performance is not a reliable indicator of future returns. *Source Bloomberg, 10th February 2012 4 24
FIX your RISK WhILE LEvERagINg your RETURNS The good news is that leveraged returns do not have to come at the expense of unlimited risk. Societe Generale has a whole range of fixed risk trading products that enable you to leverage returns in rising, flat or falling markets without ever risking more than you invest. The range is broken down into three different types of product that enable you to tackle the markets in different ways, over different time horizons, and with different levels of gearing. super10s Simple Stay High, Stay Low or Range bound exposure with fixed risk, fixed term and a fixed payout. turbos Simple short term trading of rising or falling markets with a built in stop loss. Covered Warrants Trading tools for longer term trades in rising or falling markets with no knock out features. 5 24
TaKE a SImpLE view ON ThE markets WITh SUpER10s Super10s were designed with one aim: to provide a simple way for investors to play the major markets that can be easily understood, and are completely transparent. They have a fixed risk profile, a fixed term and a fixed payout. Plus, they are listed on the London Stock Exchange so they are tightly regulated and tradable throughout market hours. a simplified view of the markets With Super10s there is no need to time your entry or exit to perfection. Super10s have a fixed investment term of between one and six months. At the end of the investment term when the Super10 expires, it will pay back 10 per unit invested, provided the Underlying Asset has never touched a pre-defined barrier level. If the barrier level is touched at any point, the Super10 terminates, and you will lose your initial investment immediately. However, as with all Listed Products, you cannot lose more than you invest. stay High, stay Low or stay within a range There are three types of Super10: Stay High Super10s, where the Underlying Asset s price must stay above a lower barrier; Stay Low Super10s, where the price must stay below an upper barrier; and Range Super10s, where the price must stay between an upper and lower barrier level. The potential payout for all Super10s is fixed at 10 per unit invested, which is paid back at expiry as long as the Underlying Asset has never touched a barrier level. scenario 2 Upper Barrier Level 6,000 example trade: su95 Ftse 100 stay Low 6,000 underlying asset The FTSE 100 Index upper barrier Level 6,000 expiry date 16/03/12 Cost per unit 7.94 per unit* Max loss 7.94 per unit* payout on the expiry date 10 per unit *Source: SG Listed Products. For illustrative purposes only. This is not a recommendation. 02/02/12. Based on the FTSE 100 level of 5,788.66 best scenario 1: the Ftse 100 remains below 6,000: In this example, the FTSE 100 has remained below the Upper Barrier Level of 6,000 throughout the Investment Term. On the Expiry Date, you will receive 10 for every unit purchased. Based on a purchase price of 7.94 per unit, you would make a profit of 25.94% i.e. 2.06 per unit. Worst scenario 2: the Ftse 100 Index touches 6,000: In this example, if the upward trend of the FTSE 100 was to continue and touch or surpass the Upper Barrier Level of 6,000 at any point during the Investment Term, the Super10 would immediately expire and you would lose your investment. Index Level time scenario 1 Expiry Finding the right balance for you To achieve higher returns you have to buy a cheaper product. This means taking more risk and selecting a product with either a longer investment term, or one where the barrier level is closer to the current level of the Underlying Asset. For illustrative purposes only. This is not a recommendation. 6 24
a sample range of Ftse super10s epic code product type expiry date Illustrative price* Lower barrier Higher barrier Max return at expiry SU95 Stay Low 3 months 7.94-6,000 10 SU94 Stay Low 3 months 9.79-6,200 10 SU96 Stay High 3 months 9.57 5,200-10 SU11 Stay High 3 months 8.76 5,400-10 SU16 Stay High 3 months 7.26 5,500-10 SU12 Range 3 months 7.70 5,000 6,000 10 SU13 Range 3 months 7.25 5,200 6,000 10 SU14 Range 3 months 8.73 5,300 6,100 10 SU15 Stay Low 3 months 4.56-5,900 10 *Prices are based on a FTSE 100 Index level of 5,788.66 For illustrative purposes only. This is not a recommendation. Source www.sglistedproducts.co.uk as of 11.30am on 2nd February 2012. For example, if you wanted the chance for higher returns than the example of SU95, you could look at SU15, a Stay Low Super10 on the FTSE 100, which with the FTSE trading at 5,788.66 costs 4.56 per unit, and offers a potential return of 119.3% on 16th March 2012, if the FTSE 100 has not touched a level of 5,900 before then. More risk means a higher potential return but a greater chance that the product will knock out, and your investment will be lost. It is up to you decide where your preference lies. 7 24
LEvERagE ShORT TERm TRaDINg OppORTUNITIES WITh TURbOS Turbos are short term leveraged investment products that are listed on the London Stock Exchange and trade through a regular stock broking account. They have a limited life (usually less than six months) and can be linked to the rising or falling value of a global index, single stock or currency pair. Turbos will generate a leveraged payout based on how far above (Long Turbos), or below (Short Turbos) the value of the Underlying Asset is in relation to a pre-determined price level called the strike price. The strike price also determines the knock out level, which is the safety mechanism that limits your potential loss by causing the Turbo to expire immediately if that level is ever touched. uncapped leveraged exposure Like our mortgage example earlier, Turbos benefit from gearing and you can buy exposure to an Underlying Asset for a fraction of the cost of buying the asset itself. A Turbo may be linked to ABC Company for example, which is currently trading at a price of 1.00. The price of the Turbo may be just 20p, but it will benefit from virtually the full movement of ABC Company s share price. So if ABC Company increases in value by 10p, so too will the Turbo. Here a 10% increase in the value of ABC Company has translated into a 50% rise in the value of the Turbo. This is generally referred to as a gearing level of five. There are two important downsides; first, you don t own the Underlying Asset. Second, gearing works against you too. Should the Underlying Asset fall, the Turbo would amplify the loss. Thanks to the knock out level, you can never lose more than you invest. However, if the knock out level is touched the Turbo will expire immediately with no value. If the value of the Underlying Asset improves after this, you will not benefit because your product will not exist anymore. putting it into practice Let s assume you think the FTSE 100 will recover to 6,000 by June. There are six Long FTSE Turbos that could suit this view. As you can see from the table below, the closer the knock out level is to the level of the FTSE 100, the cheaper the Turbo, and the higher the potential payout. This is because there is a greater risk of the knock out level being breached, and the Turbo expiring worthless. a sample range of Ftse LonG turbos epic Code underlying asset product type strike price Knock out Level expiry date parity Illustrative price* T391 FTSE 100 Long 4,400 4,400 6 months 1,000/1 1.3507 T392 FTSE 100 Long 4,600 4,600 6 months 1,000/1 1.1582 T393 FTSE 100 Long 4,800 4,800 6 months 1,000/1 0.9679 T394 FTSE 100 Long 5,000 5,000 6 months 1,000/1 0.7811 T402 FTSE 100 Long 5,200 5,200 6 months 1,000/1 0.5994 T403 FTSE 100 Long 5,400 5,400 6 months 1,000/1 0.4257 *Prices are based on a FTSE 100 Index level of 5,788.66. For illustrative purposes only. This is not a recommendation. Source www.sglistedproducts.co.uk as of 11.30am on 2nd February 2012. Let s take T392 as an example. It has a strike level of 4,600 and costs 1.1582 based on the FTSE 100 level of 5,788.66 at 11.30am on 2nd February 2012. If the FTSE 100 closes at 6,000 on the 15th June when it expires, T392 will generate a payout of 1.40, a potential profit of 20.88% from a 3.65% rise in the FTSE 100. As a Long Turbo, we calculate it as follows: the underlying asset price (6,000) strike price (4,600) parity (1,000) = turbo payout ( 1.40) 8 24
What is parity? When the Turbo is linked to a high value Underlying Asset such as the FTSE 100, it isn t practical to provide exposure to its full value as the Turbo would be too expensive. Instead, the Turbo scales down its exposure by a figure known as parity. Here, parity is 1,000, which means that you would need to buy 1,000 units of the Turbo for exposure to one unit of the index. Practically, it means we must divide any difference between the strike price and Underlying Asset s price by 1,000 to find the Turbo s profit or loss. With the FTSE 100 trading at 5,788.66, each unit of T402 is 0.5994, substantially lower than T392 which means that the product is more highly geared. As such, the potential payout on T402 based on our example where the FTSE 100 closes at 6,000 at Expiry is 0.80 (6,000 5,200 / 1,000 = 0.800), a potential profit of 33.47% on a 3.65% rise of the FTSE 100. taking more risk Like the Super10s earlier, we issue a number of different Turbos with different Strike Levels so that you can find one that suits your view on risk. If you re prepared to take more risk than T392, you might look at T402 which has a strike price of 5,200. This is a much riskier product because the FTSE 100 only has to fall 10.2% before it hits the knock out level and the product expires worthless. However, investors are compensated for this additional risk by a much lower price. Illustrative product returns on a sample range of turbos at expiry* 100.00 80.00 T391 60.00 T392 40.00 T393 % profit / loss 20.00 0-20.00 4500 4700 4900 5100 5300 5500 5700 5900 6100 6300 T394 T402 T403-40.00-60.00-80.00-100.00 Ftse 100 Index Level *Prices are based on a FTSE 100 Index level of 5,788.66. For illustrative purposes only. This is not a recommendation. Source www.sglistedproducts.co.uk as of 11.30am on 2nd February 2012. 9 24
It s your CHoICe You may not believe that the FTSE 100 will rise at all. If so, you would be more interested in the range of Short Turbos. The important point is that your final choice would be driven by your risk / reward profile. The more risk you take, the higher the potential reward, but you also have a much higher chance of losing your money too. Just remember to ask yourself five important questions when choosing your Turbo: 1. Which market are you interested in? You can select from a number of Turbos with a different Underlying Asset. 2. Will the market rise or fall? For rising markets you would be looking at Long Turbos, whereas for a falling trend you would look at Short Turbos. 3. When do you think this market move will happen? Choose a Turbo with an expiry date that suits your view as to how long you think it will take for your market view to play out. 4. How confident are you? The closer the strike level is to the Underlying Asset s current price, the cheaper the Turbo, but the higher the chance of the Turbo knocking out. 5. What s the worst that could happen? Make sure that the knock out level provides enough scope for the Underlying Asset to move without hitting this level, otherwise your invested capital will be lost. 10 24
COvERED WaRRaNTS, EXTEND your view NOT your RISK Covered Warrants, Turbos, Spread Bets and Contracts for Difference (CFDs) all essentially offer the same thing: the chance to enhance your returns from the rising or falling trend of a single stock, index, commodity or currency pair. However, Covered Warrants have several advantages that make them better suited to longer term trading. The first is the most important: like Turbos, Covered Warrants have a strictly fixed risk profile. No matter what happens, you can never lose more than you invest. This is particularly useful when extending your view beyond a short term trend. As we mentioned in the introduction, you can use a stop loss with Spread Bets and CFDs to limit your risk. However, as soon as the stop loss is triggered, you are out of the market, and your loss is crystallised. Take the Japanese Yen for example in the aftermath of the tsunami. When the tsunami hit, the Yen fell 4.93% from 10-17 March 2011. Had you set a stop loss above this level, you would have been knocked out, and you would have missed out on the subsequent recovery which saw the Yen bounce back 8.4% by 6 April 2011. With Covered Warrants there is no knock out, and as long as the product hasn t reached its strike date and expired, you would have stayed in the market and benefited from the recovery. Also, in the same way as Turbos, and unlike CFDs and Spread Bets, Covered Warrants do not charge any overnight finance costs. so what are Covered Warrants? Covered Warrants are sometimes referred to as the retail options market. Like options, there are two types: Call Warrants for rising markets, and Put Warrants for falling markets. They are also very similar to options in that you are essentially buying the right to purchase (Call) or to sell (Put) a specific Underlying Asset at a specific price (the strike price), on a specific date (the strike date). On that strike date, when the Covered Warrant expires, you will receive a payout, based on how far the Underlying Asset s price is above (Call) or below (Put) that strike price. Call Warrant payout = underlying asset s price strike price put Warrant payout = strike price underlying asset s price If however, the market goes against you, your Covered Warrant simply expires worthless and your investment is lost, but you can t lose more than you invest. trading options the easier way In 2002, when the Covered Warrants market launched in the UK, it was designed for retail traders, and as such, there are some key differences to the option markets. The trading size is smaller, they are automatically cash settled at expiry, and you can t write a Covered Warrant so you can t expose yourself to losses greater than you invested. Covered Warrants have the added security of being listed on the London Stock Exchange, meaning tradable prices are available throughout market hours. This has proved an attractive package and more and more professional investors are also taking advantage of Covered Warrants. 11 24
More ways to trade Societe Generale has the largest range of Covered Warrants in the UK, covering a huge variety of single stocks, indices, commodities and currencies. There are typically a number of Covered Warrants for each Underlying Asset with different strike dates and strike prices, giving you the flexibility to decide the direction you think the Underlying Asset will take, how far it will go, and how long it will take to get there. To achieve higher returns you have to buy a cheaper product with more gearing. This means taking more risk, and selecting a product where the strike price is further above (Call) or below (Put) the current level of the Underlying Asset, or where the Strike Date is much closer. New or more cautious investors should look for Covered Warrants which have a longer maturity and are in-the-money, which simply means that the Underlying Asset is already above (Call) or below (Put) the strike price. The table below summarises the different states of intrinsic value (difference between the strike and the spot price of the Underlying Asset): the different states of Intrinsic value description Call Warrant price put Warrant price Intrinsic value payout at expiry In-the-money Spot > Strike Spot < Strike Yes Yes At-the-money Spot = Strike Spot = Strike No No Out-of-the-money Spot < Strike Spot > Strike No No trading prior to expiry? You don t have to hold Covered Warrants until expiry, and indeed, many investors choose to sell back their position long before the strike date. Prior to expiry, a Covered Warrant s price will move according to three main variables; the Underlying Asset price, time to expiry and implied volatility. We can start with the Underlying Asset, which as the table below shows, is relatively simple: the impact of changes in the underlying asset price Changes in underlying asset Call Warrant price put Warrant price Increases Increases Decreases Decreases Decreases Increases Some Covered Warrants are more sensitive to changes in the Underlying Asset price than others. The way to check this is to look at the delta, which is a value that represents the sensitivity of a Warrant s theoretical value to a change in the price of the Underlying Asset. The lower the delta, the less sensitive the Covered Warrant will be to a change in the price of the Underlying Asset. Typically, the more out-of-the-money a Warrant is, the lower the delta. This makes it both riskier and cheaper and therefore, more highly geared. A popular delta value for investors is generally between 30% to 60% for Calls and between -30% to -60% for Puts. This data is available on our website, www.sglistedproducts.co.uk. timing is everything When it comes to Covered Warrants, time is critical. The value of both Call and Put Warrants will fall as they near expiry because the chance of them moving into the money, if they are not already, reduces as time runs out. If you are holding a Covered Warrant and the Underlying Asset for that Warrant is the same tomorrow as it was today, the Covered Warrant price itself is likely to decrease either by a fraction if the Covered Warrant has a long life or by a clearly noticeable amount, if the Covered Warrant is short dated and out-of-the-money. You can reduce the effect of time decay by choosing a strike date which is at least three or four times further away than the date at which you expect your market view to have occurred. 12 24
the impact of implied volatility Implied volatility is a measure of how erratic an Underlying Asset s price movements are likely to be. For both Calls and Puts, the higher the anticipated volatility level (implied volatility), the more expensive the Covered Warrant. You can see the implied volatility for all Covered Warrants on our website www.sglistedproducts.co.uk. bringing it all together The Underlying Asset s price, time and volatility all affect the price of the Covered Warrant and therefore the level of gearing that it provides. You need to be careful not to choose a Covered Warrant which is too highly geared, as gearing works both ways, and should be seen more as a risk indicator than as a decision-making criteria. You can research our whole range at www.sglistedproducts.co.uk, where we also have a Covered Warrant simulator to help you understand how the Covered Warrant price can move in relation to all these variables. the impact of changes in the the level of Implied volatility Changes in implied volatility Call Warrant price put Warrant price Increases Increases Increases Decreases Decreases Decreases 13 24
an example Covered Warrant trade In February 2012, Xstrata s share price was trading at 12.54. If at the time you believed that this was likely to increase in value you could have bought a Call Warrant to express your view. From the selection of Call Warrants available on Xstrata, let s assume that you selected a Call Warrant with a Strike Price of 12.00 and a Strike Date in 9 months. You purchase 1,000 Covered Warrants at an Ask price of 0.2872 for 287.20. If three months later, Xstrata s share price had risen sharply to 16.00, the Covered Warrants would now be strongly inthe-money and their price according to our calculator would be 0.50. You could sell your Warrants at this point on the secondary market for 500, giving you a profit of 212.80 and a return of 74% before broker fees are taken into account. trading before expiry If a week later, Xstrata had dropped nearly 16% to 10.00, the price of the Covered Warrant would have fallen to 0.14 according to the simulator on the Societe Generale website (www.sglistedproducts.co.uk). If you sold your position at this point, you would suffer a loss of 147.20. However, because there is no stop loss, and there is time until expiry, you may continue to hold if it suits your strategy. Illustrative investment scenario for the Xstrata Call Warrants 16.00 12.00 10.00 In-the-money Out-of-the-money Xstrata price Strike Price purchase date expiry date For illustrative purposes only. This is not a recommendation. 14 24
an illustration of potential returns on the Xstrata Call Warrants time Frame Change in Xstrata share price -10% -5% 0% 5% 10% Today % Profit / loss -25.00% -14.29% - 14.29% 28.57% Warrant price 0.21 0.24 0.28 0.32 0.36 In 3 days % Profit / loss -28.57% -14.29% - 14.29% 28.57% Warrant price 0.20 0.24 0.28 0.32 0.36 In 10 days % Profit / loss -28.57% -14.29% - 14.29% 28.57% Warrant price 0.20 0.24 0.28 0.32 0.36 In 20 days % Profit / loss -28.57% -17.86% -3.57% 10.71% 28.57% Warrant price 0.20 0.23 0.27 0.31 0.36 Source www.sglistedproducts.co.uk. Indicative information only. Such forecasts are not a reliable indicator of future performance. They do not take into account potential brokerage fees and must be considered as potential Gross Performance. These results are not based on and do not refer to simulated past performance and are based on reasonable assumptions. Holding until expiry At Expiry in December, if you still held your Covered Warrants they would automatically pay any return due to your stockbroker account. For example, if the share price remained at 16.00, you would get 0.40 per unit, or 400 overall, which is calculated as: 16.00 (price of Xstrata) 12.00 (the strike price) parity (10) = 0.40 per Warrant Here, parity is 10, which means that you would need to buy 10 Warrants for exposure to one Xstrata share. Practically, it means we must divide any difference between the strike price and Underlying Asset price by 10 to find the Covered Warrant s profit or loss at Expiry. The fall in price is due to the fact that the Covered Warrant has no Time Value at Expiry. If Xstrata closes at 12.00 or less, your position would simply close with no value and you would lose your initial investment. 15 24
In summary, HoW do these products CoMpare WItH spread bets? Each of our products provide a significant benefit over Spread Bets. See how they compare below: risks of spread bets benefits of our products You can lose more than you invest. You will never lose more than you invest. Stop losses do not allow your asset to recover. Stop losses may not be precise. Relies on market timing and precise entry and exit points. Covered Warrants have no knock out feature and can recover after a significant fall as long as there is time left until Expiry. With Turbos, once the Underlying Asset hits the Knock Out level, your product will expire immediately with no slippage. With Super10s, you do not need to time your position to perfection. You just need to take a general market view. i.e. will the Underlying Asset stay high, low, or within a range? easy to trade LIKe a share In your stockbroking account All of our products, technically known as securitised derivatives are listed on the London Stock Exchange, which means that you can monitor the price throughout UK market hours (08:15 16:30). At any time during normal market conditions, you have the flexibility to buy or sell units of your chosen product through your stockbroker in exactly the same way as you would buy a share. The only difference is that before trading for the first time your broker will need to assess whether or not these products are appropriate for you to invest in. This is a requirement of the Financial Service Conduct of Business rules, and also a key element in assessing whether customers are being treated fairly (FSA s Principle 6). It is much the same as the process for signing up to a spread betting account, and relates to the fact that the products are all derivatives, and it is important that you understand the risks of the products before investing. two layers of regulation Transparency and flexibility are not the only benefits to trading a London Stock Exchange listed product. These products are also governed by the rules of the exchange, which include: Live prices must be provided throughout the trading day in normal market conditions on the London Stock Exchange. All investors see the same price. Minimum tradable volumes to ensure liquidity Maximum Bid (the price at which you can sell) / Ask (The price at which you buy) spread of 2 pence or 10% of the Ask price to ensure that trading costs are kept to a minimum. At Societe Generale we aim to maintain the spread of the Underlying Asset to ensure tight pricing. The result of this double layer of regulation is that you can trade more confidently, knowing that you are buying and selling a real investment product, which must comply to strict trading standards set to protect the interests of investors, and ensure robust, consistent and sustainable trading conditions. 16 24
no minimum trading size Listed products were designed with the retail trader in mind and as such, there are no minimum trading sizes. This doesn t mean that they are any less sophisticated, as the platform, price and service level is the same whether you are a professional investor trading millions of pounds, or a private investor trading hundreds. It just means that you can buy as little as one unit, which in the case of Covered Warrants or Turbos could be as little as 10 pence. In reality, trading just one unit would not make economic sense. Your broker will charge you a dealing commission of between 5.99 and 14.00 on any buy or sell order, much the same as they would if you buy or sell shares. This does mean that you need to trade enough to ensure that if your market view plays out, your trade is profitable. Costs and fees It is important to understand the full costs of investment so that you can evaluate the full return that you can expect at maturity. There are two costs involved in trading listed products: 1. brokerage costs Your stock broker will charge you a fee to buy or sell units of a listed product. This is typically the same cost as trading a share. 2. bid/ask spread There is a small difference between the price at which you buy the Ask price, and the price at which you could sell the Bid price. This equates to a cost of investment if you sell your product before the Expiry Date. eligibility* Covered Warrants, Turbos and Super10s are eligible for inclusion in a Self Invested Pension Plan. tax treatment* Covered Warrants, Turbos and Super10s are subject to Capital Gains Tax. No stamp duty is to be paid and they are not eligible for ISAs. *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. 17 24
WhaT are ThE RISKS? Capital at risk As leveraged products, Investors in these products should be aware that if the Underlying Asset moves in the opposite direction to that anticipated, the losses incurred by these products will be greater in percentage terms than those incurred by a direct investment in the Underlying Asset itself. Although you cannot lose more than you invest, with Covered Warrants, Turbos and Super10s, your entire invested capital is at risk. Knock out risk Turbos and Super10s have knock out barrier levels built in. If the Underlying Asset touches the knock out level at any time during the life of the investment, the product will expire immediately with no value. Counterparty risk Covered Warrants, Turbos and Super10s are issued by Societe Generale Acceptance, a member of the SOCIETE GENERALE group of companies. Any failure by Societe Generale Acceptance as Issuer, or by Societe Generale as Guarantor, to make payments due under the Covered Warrant may result in the loss of all or part of your investment. These products are not eligible for compensation from the Financial Services Compensation Scheme or any other compensation scheme. underlying asset risk The value of the Covered Warrant, Turbo or Super10 will depend on the value of the Underlying Asset, which may be volatile. Liquidity risk Societe Generale is the only market-maker for these products and therefore the only liquidity provider. Liquidity will only be available in normal market conditions. secondary Market There may be cases in which there is no guarantee that liquidity or live prices will be available on the secondary market, such as: Underlying Asset s price is suspended or not tradable There is a failure in the LSE or Societe Generale systems Abnormal trading situations e.g. sudden and sharp volatility increase or lack of liquidity in the Underlying Asset. This means that you may find it difficult or impossible in certain circumstances to sell the Covered Warrant, Turbo or Super10, or may be offered a price less than what you paid for it. Currency risk If the product is quoted in a different currency to the Underlying Asset, currency risk exists. 18 24
golden RULES FOR TRaDINg LISTED products There are no secrets to the markets, or guarantees for big profits but there are a number of steps that you can take to improve your chance of gaining a positive result. The key is to be disciplined in your approach and conduct a full appraisal of your product: step 1: assess the risks Prior to any investment, you should make your own appraisal of the risks from a financial, legal and tax perspective, without relying exclusively on the information with which you are provided, by consulting, if you deem it necessary, your own suitably qualified investment advisors in these matters or any other professional advisors. In particular, you must remember that your entire invested capital is at risk. As a consequence, you should not deal in these products unless you understand their nature and the extent of their exposure to risk. step 2: define a scenario with a specific timeframe Once the risks are assessed, you will have to select an Underlying Asset and an investment view (bullish or bearish) over a certain time period. For instance, you anticipate a 150 point growth in the FTSE 100 over the next 6 months, or you might identify a trading opportunity in a major stock, commodity or currency market. Unless you are trading Super10s, thinking that the FTSE 100 will rise is not a detailed enough scenario. You need to decide how long you think the move will take, what your target level at which you will sell the product is, and what your stop loss level would be if the market does not go your way. step 3: do your research, go to www.sglistedproducts.co.uk There are some simple ground rules at this stage: If you have a bullish market view, i.e. you anticipate a rise in the Underlying Asset, select a Call Warrant, a Long Turbo or a Stay High Super10. If it is a bearish view, i.e. you anticipate a fall in the Underlying Asset, select a Put Warrant, a Short Turbo or a Stay Low Super10. If you think markets will stay flat, you may consider Range Super10s to be most suitable. If you would prefer to talk to someone at Societe Generale, you can call our desk on 0800 328 1199. We are not authorised to give you any advice on any particular product, but we would be more than happy to discuss our products. step 4: simulate the outcome By using the Covered Warrant simulator available on www.sglistedproducts.co.uk, you can see what will potentially happen to a Covered Warrant s value if your view as to the selected Underlying Asset plays out. This helps you to estimate the impact on the price of the Covered Warrant for a given movement in the Underlying Asset s price, volatility or time. You can also use this tool to simulate different outcomes and gain a good understanding of the potential risks and return for each product. The outcome of the simulator is for information purposes only and not an indicator or a guarantee of future performance. Under no circumstance should it, in whole or in part, be considered as an offer to enter into a transaction. step 5: remain disciplined You took your time to formulate your view. You chose a product and you set your target profit level and your stop loss level to sell. Now stick to it. There is nothing more important than cutting losses in trading, particularly trading in leveraged products. If the trade doesn t go your way immediately and stay that way, cut the trade at your stop loss level, no matter how much you lose. However, if the market does go your way, don t get carried away and forget to take profit at your chosen level. As we ve seen earlier, the specific product for you will depend on your own view and your own tolerance for risk. Our website, www.sglistedproducts.co.uk, provides an educational section which you can use to improve your understanding of our products. In this section, you can also download our guides to Covered Warrants, Turbos or Super10s. We also offer free educational seminars which you can attend, and you can even practice your trading strategy on our virtual trading platform at www.sgmarketmaster.co.uk. 19 24
SOCIETE generale, a WORLD LEaDER IN LISTED products Listed Products are ingrained in Societe Generale s DNA. Since the creation of the fi rst listed product in 1989, Societe Generale has been a key force behind the growth of the market; opening new Covered Warrant markets in Paris, Hong Kong, Madrid, the Nordics, London and Japan. The Listed Products market has grown considerably since 1989, and in 2011 over EUR 380m traded across the global stock exchanges. As the world leader in Listed Products with EUR 51,161bn traded*, Societe Generale is a dominant force in the market and has considerable skills, resources and experience. In the UK we have been recognised for our history of innovation, and with the biggest range of Covered Warrants and Turbos in the UK, have won the Shares Award for the best Covered Warrants and Turbos provider for three consecutive years and the FT s Investor s Chronicle award for best Covered Warrants provider. With almost 1000 products listed on the London Stock Exchange, Societe Generale has the depth of product offering to help virtually any kind of investor to meet their investment objectives. Investment strategies Societe Generale Investment strategies recognise that no two people are the same; we all have our own investment views, our own risk tolerances, and our own time horizons to cater for. Plus, markets don t always rise and sometimes we have to be a bit smarter in our search for returns. Through this extensive range of Capital Protection, Yield Enhancement and Growth Participation products, investors of all risk appetites can access opportunities in rising, falling or fl at markets. It may be for the chance to secure a defi ned return during fl at markets, the ability to gear up returns during a rising market, or it may simply be for the re-assurance of protecting some or all of your capital. It may even be a combination of these things. Whatever the objective, Investment Strategies can provide an innovative, dynamic and fl exible way to exercise a more specifi c market view. Leverage products Our range of fi xed risk leverage products can be used to leverage your bullish or bearish view on an Underlying Asset, as well as for portfolio protection strategies. They offer unlimited upside potential but capital is fully at risk. replication products These products are for passive investors who wish to gain cost effective access to a specifi c region, sector, theme, asset class or commodity. As a tracking product, the price of the product will rise or fall in line with the value of the asset that it tracks. These products are typically suited for the longer term investor who is looking to build a low cost, diversifi ed portfolio. *Source: Societe Generale, December 2011 Find out more at www.sglistedproducts.co.uk or call 0800 328 1199 20 24
glossary OF TERmS at-the-money A Covered Warrant whose exercise price is near or equal to the Underlying Asset s price. Call Covered Warrant A Covered Warrant which gives the Covered Warrant holder the right, but not the obligation, to buy the Underlying Asset at a predetermined price (strike price), on a predetermined date (expiry date). The value of a Call Warrant will generally appreciate when the price of the Underlying Asset appreciates. delta A value that represents the sensitivity of a warrant s theoretical value to a change in the price of the Underlying Asset. epic code Every product has a unique identifier called an Epic code. This is the code that you would quote to your broker in order to buy or sell the product. expiry date The date after which the product may no longer be exercised or traded. Gearing The amount by which the Listed Product s price should move in relation to a 1% change in the price of the Underlying Asset. For example, if a Listed Product has a gearing of 8x, a 1% move in the Underlying Asset would result in an 8% move in the price of the Listed Product. Intrinsic value For a Call Covered Warrant, the amount equal to the market value of the Underlying Asset less the strike price. For a Put Covered Warrant, the amount equal to the strike price less the market value of the Underlying Asset. The intrinsic value corresponds to the amount by which a Covered Warrant is inthe-money. In-the-money A Covered Warrant with a strike price below (for a Call Covered Warrant) or above (for a Put Covered Warrant) the price of the Underlying Asset. Investment term All Covered Warrants, Turbos and Super10s will have a fixed Investment Term, which is typically between one and twelve months. Leverage effect A feature of Covered Warrants which describes the fact that changes in a Covered Warrant s price (in percentage terms) will be larger than those observed for the Underlying Asset. Leverage is also called Gearing. Long turbo Provides geared exposure to a short term rise in an Underlying Asset price. Lower barrier Level The Lower Barrier Level represents the level at which the product will terminate immediately if the Underlying Asset ever falls to a level that is equal to or below that level. If the Lower Barrier Level is hit at any point during the Investment Term, the entire capital is lost immediately. If not, the Super10 will pay out 10 per unit purchased on the Expiry Date. Maximum loss The maximum loss that can be incurred is known in advance and is always strictly limited to the initial investment. If the investor thinks that the Underlying Asset is moving in the opposite direction to their initial view, the product could be sold back either to make a profit or minimise a loss (dependent on the Bid price available at the time of sale). The entire capital is at risk. out-of-the-money A Covered Warrant with a strike price above (for a Call Covered Warrant) or below (for a Put Covered Warrant) the price of the Underlying Asset. parity The theoretical number of Covered Warrants or Turbos that would give the right to either buy (for Call Covered Warrant or Long Turbos) or sell (for Put Covered Warrants or Short Turbos) one unit of the Underlying Asset. An investment of 1 Turbo on an index with a parity of 1,000, would give exposure to one thousandth of the index. Note, however that the minimum trading size is 1 unit. premium The premium is the price needed to be paid in order to buy a product. Societe Generale offers constant Bid/Ask prices throughout the trading day which enable these products to trade readily. put Covered Warrant A Covered Warrant which gives the Covered Warrant holder the right, but not the obligation, to sell the Underlying Asset at a predetermined price (strike price), on a predetermined date (expiry date). The value of a Put Covered Warrant will generally appreciate when the price of the Underlying Asset depreciates. redemption value of a turbo The Redemption Value is the difference between the Underlying Asset s price and the Strike price. Where the Knock-Out barrier is hit, the investor will receive a redemption value which is calculated for Long Turbos by taking the lowest level of the Underlying Asset s price during the 30 minutes following the Knock-Out barrier being hit. For Short Turbos the redemption value will be the highest level of the Underlying Asset s price during the 30 minutes following the knock-out barrier being hit. 21 24
securitised derivative Instruments that derive their value from another security (the Underlying Asset), such as a share, shareprice index, currency or bond. sedol Stock Exchange Daily Official List. short turbo Provides geared exposure to a short term fall in an Underlying Asset price. spot The latest trading price of the Underlying Asset s share or index. spread (bid / offer) There is always a spread between the buy (Ask) and sell (Bid) price. As with shares, investors always buy at the higher price (Ask price) and sell at the lower price (Bid price). Under normal market conditions, Societe Generale provides Bid / Ask spreads throughout the trading day to provide liquidity. strike price It is the reference level for the Underlying Asset from which the Turbo or Covered Warrant is evaluated. The level is predetermined at the issue of the product. stay Low super10s Stay Low Super10s are designed for the investor who believes the Underlying Asset will stay below an Upper Barrier Level throughout the Investment Term. stay High super10s Stay High Super10s are designed for the investor who believes the Underlying Asset will stay above a Lower Barrier Level throughout the Investment Term. range super10s Range Super10s are designed for the investor who believes the Underlying Asset will stay below an Upper Barrier Level and above a Lower Barrier Level throughout the Investment Term. stop loss A spot price/level where the investor will sell the Underlying Asset, designed to limit an investor s loss on a position. theta A value that represents the sensitivity of a Covered Warrant s value to the passage of time. Theta (pence a day) shows the theoretical fall in the Covered Warrant price for one day with all other factors remaining constant. Theta per day accelerates as the warrant nears maturity. time decay A term used to describe how the value of a Covered Warrant erodes or reduces with the passage of time. Time decay is quantified by the Theta. time value The portion of a Covered Warrant s price that is not accounted for by the intrinsic value. upper barrier Level The Upper Barrier Level represents the level at which the product will terminate immediately if the Underlying Asset ever rises to a level that is equal to, or above that level. If the Upper Barrier Level is hit at any point during the Investment Term, the entire capital is lost immediately. If not, the Super10 pays out 10 per unit purchased on the Expiry Date. underlying asset All Covered Warrants, Turbos and Super10s are linked to an Underlying Asset such as an index, commodity or single stock. Warrant Warrants are issued by a financial institution, which defines their characteristics. They are traded on the LSE and settled through CREST, in the same manner as share trades. volatility Volatility represents the extent that the price of the Underlying Asset has moved during a specific time period. The historical volatility of the Underlying Asset can be calculated by taking the historical return during a defined period. However, when pricing a Covered Warrant, it is necessary to take into consideration the volatility which is anticipated (or implied ) by the financial markets for the lifetime of the Covered Warrant as it will dictate whether the Covered Warrant is likely to expire in-the-money or not. target Level The target level at expiry for a Covered Warrant is the expected Underlying Asset s closing spot price / level an investor will use to calculate the potential redemption value. An investor trading a Call Covered Warrant would expect the Underlying Asset s spot to be above the strike, and below the strike for a Put Covered Warrant. 22 24