Information on investment risks

The advice given below is designed as a primer for investing in money market and capital market instruments, and to help you recognize and define your own risk tolerance for investments. The information presented here however cannot replace talking in person with your account manager.

Therefore, we request that you read this information carefully. Your account manager will gladly answer any questions you might have.

Risk means the possibility of failing to achieve the expected return on an investment and/or losing all or part of the invested capital. Such risk may be due to a variety of causes, depending on the specific structure of the product concerned. Such causes may be inherent in the product, the markets, or the issuer. Since risks are not always foreseeable, the following discussion must not be considered to be conclusive.

In any case, investors should pay particularly close attention to any risk related to the credit rating of the issuer of a product, which always depends on the individual case.

The description of the investment products is based on the most typical product characteristics. The decisive factor is always the specific structure of the product in question. For that reason, the following description is no substitute for a thorough examination of the specific product by the investor.

Generally, the following should be kept in mind when investing in securities:

  1. The potential return of every investment depends directly on the degree of risk. The higher the potential return, the higher the risk.
  2. Irrational factors (sentiment, opinions, expectations, rumors) may also impact prices and thus the return on your investment.
  3. Investing in several different types of securities can help to reduce the risk of the overall position (principle of risk diversification).
  4. Every customer is responsible for the proper taxation of his or her investment. The credit institution is not permitted to give tax advice outside the scope of investment advice.

Currency risk
In the case of transactions in foreign currency, the return and performance of an investment depends not only on the local yield of the security in the foreign market, but also heavily on the exchange rate development of the respective foreign currency relative to the currency of the investor (e.g. euro). This means that exchange rate fluctuations may increase or decrease the return and value of the investment

Transfer risk
Depending on the respective country involved, securities of foreign issuers pose the additional risk that political or exchange-control measures may complicate or even prevent the realisation of the investment. In addition, problems in connection with the settlement of an order may occur. In the case of foreign-currency transactions, such measures may obstruct the free convertibility of the currency.

Country risk
The country risk is the creditworthiness of a given country. The political or economic risk posed by a country may have negative consequences for all counterparties residing in this country.

Liquidity risk
Tradability (liquidity) refers to the possibility of buying or selling a security or closing out a position at the current market price at any time whatsoever. The market in a particular security is said to be narrow if an average sell order (measured by the usual trading volume) causes perceptible price fluctuations and if the order cannot be settled at all or only at a substantially lower price.

Credit risk
Credit risk refers to the possibility of counterpart default, i.e. the inability of one party to a transaction to meet obligations such as dividend payments, interest payments, repayment of principal when due or to meet such obligations for full value. Also called repayment risk or issuer's risk. Such risks are graded by means of “ratings”. A rating is scale of evaluation used to grade an issuer’s creditworthiness. The rating is prepared by rating agencies, notably on the basis of credit risk and country risk. The rating scale ranges from “AAA” (best credit rating) to “D” (worst credit rating).

Interest rate risk
The risk that losses will be incurred as a result of future interest rate movements in the market. A rise in interest rates on the market will lower the market price of a fixed-interest bond, whereas a fall in such interest rates will raise the market price of the bond.

Price risk
The risk of adverse movements in the value of individual investments. In the case of contingent liability transactions (forward exchange deals, futures, option writing, etc.), it is therefore necessary to provide collateral (margin requirement) or to put up further margin, which means tying up liquidity.

Risk of total loss
The risk that an investment may become completely worthless, e.g. due to its conception as a limited right. Total loss can occur, in particular, when the issuer of a security is no longer capable of meeting its payment obligations (insolvent), for economic or legal reasons.

Buying securities on credit
The purchase of securities on credit poses an increased risk. The credit raised must be repaid irrespective of the success of the investment. Furthermore, the credit costs reduce the return.

Placing orders
Buy or sell orders placed with the bank must at least indicate the designation of the investment, the quantity (number of securities/principal amount) to be purchased or sold, at what price the transaction should be carried out and over what period of time the order is valid.

Price limit
If buy or sell orders are placed with the instruction "at best" (no price limit), deals will be executed at the best possible price. This way, the capital requirement/selling proceeds remain unceratin. With a buy limit, the purchase price and thus the amount of capital employed is limited. No purchases will be made above the price limit. A sales limit stipulates the lowest acceptable selling price; no deals will be carried out below this price limit.

Important note: A stop market order will not be executed until the price formed on the stock reaches the selected stop limit. Once the order has been executed, it will enter into effect as an “at best” order, i.e. with no price limit. The price actually obtained may therefore differ significantly from the selected stop limit, especially in the case of securities on a tight market.

Time limit
You can set a time limit to determine the validity of orders. The period of validity of unlimited orders depends on the practices of the respective stock market.

Your CA investment adviser will inform you of further additions which can be made when placing an order.

Guaranty
The term “guaranty” may have a variety of meanings. The first meaning is the commitment made by a third party other than the issuer in order to ensure that the issuer will meet its liabilities. Another meaning is a commitment made by the issuer itself to perform a certain action regardless of the trend in certain indicators that would otherwise determine the amount of the issuer’s liability. Guaranties may also be related to a wide variety of other circumstances.

Capital guaranties are usually enforceable only until end of term (repayment), so that price fluctuations (price losses) are quite possible during the term. The quality of a capital guaranty depends to a significant extent on the guarantor’s creditworthiness.

Tax considerations
Your CA investment adviser will provide you with information on the general fiscal aspects of the individual investment products. The impact of an investment on your personal tax bill must be evaluated together with a tax consultant.

Risks on stock markets, especially secondary markets (e.g. Eastern Europe, Latin America, etc.)
There is no direct line of communications with most of the stock exchanges on secondary markets, i.e. all the orders must be forwarded by telephone. This can lead to mistakes or time delays.

In certain secondary stock markets, limited buy and sell orders are generally not possible. This means that limited orders cannot be given until the request has been made by telephone with the local broker, which can lead to time delays. In certain cases, such limits cannot be executed at all.

In certain stock markets it is difficult to receive the current prices on an ongoing basis, which makes it difficult to assess the customer’s existing position.

If a trading quotation is discontinued on stock exchange, it may no longer be possible to see such securities on the exchange in question. A transfer to another stock market may also cause problems.

In certain exchanges of secondary markets, the trading hours by no means correspond to Western European standards. Short trading hours of only three or four hours per day can lead to bottlenecks or failure to process securities orders.

Definition
Bonds (= debentures, notes) are securities that obligate the issuer (= debtor) to pay the bondholder (= creditor, buyer) interest on the capital invested and to repay the principal amount according to the bond terms. Besides such bonds in the strict sense of the term, there are also debentures that differ significantly from the above-mentioned characteristics and the description given below. We refer the reader in particular to the debentures described in the “Structured Products” section. Especially in that area, it is not the designation as a bond or debenture that is decisive for the product-specific risks but rather the specific structure of the product.

Return
The bond yield is composed of the interest on the capital and any difference between the purchase price and the price achieved upon sale/redemption of the bond.

Consequently, the return can only be determined in advance if the bond is held until maturity. With variable interest rates, the return cannot be specified in advance. For the sake of comparison, an annual yield (based on the assumption of bullet repayment) is calculated in line with international standards. Bond yields which are significantly above the generally customary level should always be questioned, with an increased credit risk being a possible reason.

The price achieved when selling a bond prior to redemption (market price) is not known in advance. Consequently, the return may be higher or lower than the yield calculated initially. In addition, transaction costs, if any, must be deducted from the overall return.

Credit risk
There is always the risk that the debtor is unable to pay all or part of his obligations, e.g. in the case of the debtor's insolvency. The credit standing of the debtor must therefore be considered in an investment decision.

Credit ratings (assessment of the creditworthiness of organisations) issued by independent rating agencies provide some guidance in this respect. The highest creditworthiness is "AAA" (e.g. for Austrian government bonds). In the case of low ratings (e.g. "B" or "C"), the risk of default (credit risk) is higher but by way of compensation the instruments generally pay a higher interest rate (risk premium). Investments with a rating comparable to BBB or higher are generally referred to as “investment grade”.

Price risk
If a bond is kept until maturity, the investor will receive the redemption price as stated in the bond terms. Please note the risk of early calling-in by the issuer, to the extent permitted by the terms and conditions of the issue.

If a bond is sold prior to maturity, the investor will receive the current market price. This price is regulated by supply and demand, which is also subject to the current interest rate level. For instance, the price of fixed-rate securities will fall if the interest on bonds with comparable maturities rises. Conversely, bonds will gain in value if the interest on bonds with comparable maturities falls.

A change in the issuer's creditworthiness may also affect the market price of a bond.

In the case of variable-interest bonds whose interest rate is indexed to the capital market rates, the risk of the interest being or becoming flat is considerably higher than with bonds whose interest rate depends on the money market rates.

The degree of change in the price of a bond in response to a change in the interest level is described by the indicator “duration”. The duration depends on the bond’s residual time to maturity. The bigger the duration, the greater the impact of changes of the general interest rate on the price, whether in a positive or negative direction.

Liquidity risk
The tradability of bonds depends on several factors, e.g. issuing volume, remaining time to maturity, stock market rules and market conditions. Bonds which are difficult to sell or cannot be sold at all must be held until maturity.

Bond trading
Bonds are traded on a stock exchange or over-the-counter. Your bank will quote buying and selling rates for certain bonds upon request.

There is no entitlement to negotiability, however.

In the case of bonds that are also traded on the stock market, the prices formed on the exhange may differ considerably from the off-the-market quotations. The risk of weak trading may be restricted by adding a limit on the order.

Some special bonds

Supplementary capital bonds
These are special subordinated bonds issued by Austrian banks. Interest payment can only be made if the bank has posted sufficient net profit for the year (before movement of reserves). Repayment of the capital prior to liquidation is subject to prorated deduction of the net loss accruing throughout the term of the supplementary capital bond.

Subordinated bank bonds
In case of the debtor's liquidation or insolvency, the investor will receive money only after all other, non-subordinated liabilities of the bond debtor have been settled. It is not possible to offset the claims to repayment arising out of the subordinated bond against the bond issuer’s claims.

High-yield bonds
High-yield bonds are securities for which an issuing entity (= debtor, issuer) with a low credit rating commits itself to the payment of fixed or variable interest on the capital received and to repay the capital to the holder (= creditor, buyer) in accordance with the terms of issue.

Your customer adviser will be pleased to inform you about further special bond types such as bonds with warrants, convertible bonds, zero-coupon bonds, etc.

Definition
Shares are securities evidencing an interest held in an enterprise (public limited company). The principal rights of shareholders are participating in the company's profits as well as the right to vote in the shareholders' meeting (exception: preferred stock).

Return
The yield on equity investments is composed of dividend payments as well as price gains or losses and cannot be predicted with certainty. The dividend is the distribution of earnings to shareholders as decided at the shareholders’ meeting. The dividend amount is expressed either as an absolute amount per share or as a percentage of the nominal value of the stock. The yield obtained from the dividend in relation to the share price is called dividend yield. In general, it is considerably lower than the dividend indicated as a percentage of the nominal value.

The greater part of earnings from equity investments is usually achieved from the stock's performance/price trend (see price risk).

Price risk
Stocks are usually traded on a public exchange. As a rule, prices are established daily on the basis of supply and demand. Investments in stocks may lead to considerable losses.

In general, the price of a stock depends on the business trend of the respective company as well as the general economic and political setting. Besides, irrational factors (investor sentiment, public opinion) may also influence the share price trend and thus the return on an investment.

Credit risk
As a shareholder, you hold an interest in a company. Consequently, your investments may be rendered worthless in particular by the company's insolvency.

Liquidity risk
Tradability may be limited in the case of shares with a narrow market (especially stocks quoted in the "Unregulated Market, over-the-counter trade).

If a stock is quoted in several stock exchanges, that may lead to differences in its negotiability on different international stock exchanges (e.g. quotation of an American stock in Frankfurt).

Stock trading
Stocks are traded on a public exchange and sometimes over-the-counter. In the case of stock exchange trading, the relevant stock exchange rules (trading lots, order types, contract settlement, etc.) must be observed. If a share is quoted at different stock exchanges in different currencies (e.g. a US stock quoted in euros at the Frankfurt Stock Exchange) it also entails an exchange rate risk. Please contact your investment adviser for further details.

When purchasing a stock in a foreign exchange, please bear in mind that foreign exchanges always charge “third-party fees” that accrue in addition to the bank’s usual fees. For the exact amount of such fees, contact your customer adviser.

Austrian investment funds

General
Certificates of participation in Austrian investment funds (investment fund certificates) are securities which evidence joint ownership in an investment fund. Investment funds invest the funds provided by investors in accordance with the principle of risk diversification. The three basic types of investment funds are bond funds, stock funds as well as mixed funds, investing both in bonds and stocks. Funds may invest in domestic and/or foreign securities.

The range of investment of domestic investment funds includes not only securities but also money market instruments, liquid financial investments, derivative products and investment fund shares. Investment funds may invest in foreign and domestic securities.

Moreover, funds are subdivided into investment funds (which pay dividends), growth funds (which do not pay dividends), and “funds of funds”. Unlike investment funds, growth funds do not pay out dividends but rather reinvest them in the fund. Funds of funds invest in other domestic and/or foreign funds. Guaranty funds are subject to a binding commitment by a guarantor commissioned by the fund with respect to distributions of dividends for a certain period, repayment of principal, or performance.

Return
The return on investment fund certificates is composed of the annual distributions (provided they are not distributing and non-accumulative funds) and the trend in the value of the certificates. It cannot be established in advance. The trend in value depends on the investment policy specified in the fund terms, as well as the market trends of the individual securities held by the fund. Depending on the composition of a fund's portfolio, the relevant risk warning notices for bonds, stocks or warrants must be taken into account.

Price/rating risk
Investment fund certificates can normally be returned at any time at the repurchase price. Under exceptional circumstances, the repurchase of certificates can be temporarily suspended until the sale of fund assets and the receipt of sales proceeds. Your investment adviser will be pleased to inform you about any fees charged and the execution date of your buy and sell orders. The term of an investment fund depends on the fund conditions and is usually unlimited. Please keep in mind that investment fund certificates, unlike bonds, are not normally redeemed and, consequently, do not carry a fixed redemption price. The risk of investment fund certificates depends, as already mentioned, on the fund's stated investment objectives and the market trends. A loss cannot be ruled out. Although investment fund certificates can normally be returned at any time, they are instruments designed for investments over a prolonged period of time.

Like stocks, funds can be traded on exchanges. The prices that arise on the exchange in question may differ from the redemption price. In that regard please see the information on risks related to stocks.

Tax considerations
The fiscal treatment of investment fund distributions varies according to the type of investment fund.

Foreign investment companies
Foreign investment companies are governed by separate legal provisions, which may substantially differ from those applicable in Austria. In particular, stipulations on supervision are often less severe than in Austria.

Outside Austria, there are also closed-end funds and funds ruled by corporate law, whose prices are regulated by supply and demand rather than the intrinsic value of the fund, which is roughly comparable to the establishment of stock prices.

Regardless of their legal form, the dividends and return distributed by foreign investment companies (e.g. non-distributing funds), the earnings equivalent to distribution payments are subject to other fiscal stipulations.

Exchange Traded Funds
Exchange Traded Funds (ETFs) are fund shares that are traded like equities on a stock exchange. An ETF generally forms a basket of securities (e.g. a basket of stocks) that reflects the composition of an index, i.e. that tracks the index in one certificate by means of the securities contained in the index and their current weighting, so that ETFs are often referred to as “index stocks”.

Return
The return depends on the price trend of the underlying securities in the securities basket.

Risk
The risk depends on the underlying securities in the security basket.

General
Austrian property funds are special funds owned by an investment trust that holds and manages the special fund in trust on behalf of the shareholders. The unit certificates represent a contractual claim to share in the profits of the special fund. Property funds invest the funds received from the shareholders according to the principle of risk diversification, especially in land, building, shares in property companies, and similar property holdings, as well as its own construction projects; they also hold liquid financial investments (investments in liquid assets), such as securities and bank deposits. The liquid investments serve to secure the property fund’s outstanding payment obligations (e.g. due to purchase of real estate) and repurchase of unit certificates.

Return
The total return of property funds from the shareholder’s point of view consists of the annual dividends (to the extent that the funds distribute dividends instead of reinvesting them) and the price trend of the calculated share value of the fund. The amount of return cannot be determined in advance. The property fund’s performance depends on the investment policy established in the fund regulations, the market trend, the specific properties held by the fund, and the other fund components (securities, bank balances). The historic performance of a property fund is not indicative of its future performance.

Property funds are exposed to the risk of reduced return due to vacancies in the buildings, among other things. Particularly in the case of the fund’s own construction projects, there may be problems with initial rental. Vacancies may have a negative impact on the value of the property fund and lead to reduced dividends. Investing in property funds may also lead to a partial loss of the invested capital.

Property funds also invest liquid funds and cash in banks in other forms of investment, especially interest-bearing securities. That portion of the fund assets is therefore subject to specific risks applicable to the selected form of investment. When property funds invest in foreign projects outside the Euro Zone, the shareholder is also exposed to currency risks, since the market value and return from such foreign property are converted to Euros when calculating the price of issue or redemption of the unit certificates.

Price/Valuation Risk
Unit certificates may usually be given back for the redemption price at any time. Please bear in mind that in the case of property funds, the redemption of unit certificates may be subject to restrictions. Under exceptional circumstances, redemption may be temporarily postponed until the underlying assets of the property fund have been sold and the proceeds from the sale have been received. In particular, the fund regulations may stipulate that following the restitution of a large number of unit certificates, redemption may be postponed for a lengthy period of up to two years. In such cases, the fund cannot disburse the redemption price during that period will not be possible. Property funds are typically classified as long-term investment projects.

Definition
Warrants are securities without interest and dividends attached, granting the owner the right to buy (call warrants) or sell (put warrants) a certain underlying asset (e.g. shares) at a previously fixed price (exercise price).

Return
The buyer of a call warrant has secured the purchase price of the underlying asset. A return can be obtained if the market price of the underlying asset exceeds the stipulated exercise price to the paid by the investor. The warrant holder may then buy the underlying instrument at the strike price and sell it immediately at the ruling market price.

An increase in the price of the underlying asset will usually lead to a proportionately higher percentage increase in the warrant price (leverage effect). Consequently, most warrant holders achieve a return through selling warrants.

The same applies, in the opposite direction, to put warrants. They usually rise in value if the price of the underlying asset decreases.

The return on warrant transactions cannot be established in advance.

The maximum loss is limited to the amount of capital invested.

Price risk
The risk inherent in warrant transactions is the possibility that, between purchase and expiration of the warrant, the underlying asset develops differently than expected at the time of purchase. In the worst case, the entire capital invested may be lost.

The price of a warrant depends also on the following factors:

  • Volatility of the underlying asset (a measure of the fluctuation margin anticipated at the time of purchase and, simultaneously, the most important input for determining the fairness of the warrant price). High volatility general implies a higher price for the warrant.
  • Remaining time to maturity (the longer the maturity of a warrant, the higher the price).

A decrease of volatility or diminishing time to maturity may cause the price of a warrant to remain unchaged or fall - even though the expectations in respect of the price trend of the underlying asset are met.

We generally advise against the purchase of warrants which are close to expiry. Buying warrants with high volatility makes your investment more expensive and is therefore highly speculative.

Liquidity risk
Warrants are usually issued only in small quantities, which increases the liquidity risk for investors. Because of this, individual warrants may be subject to particularly heavy price fluctuations.

Warrant trading
Warrants are traded on stock exchanges as well as over the counter (OTC). In many cases, the gap between the purchase price and selling price is larger for warrants traded OTC. This difference is for your account.

With respect to stock exchange trading, it is important to remember that the market has very low liquidity.

Warrant terms
Warrants do not have standardised terms. It is therefore imperative to obtain full information on the exact terms and conditions of a warrant, in particular:

  • Style of exercise: Is the warrant exercisable at any time during its life (American option) or only at expiry (European option)?
  • Subscription ratio: How many warrants are needed to obtain the underlying asset?
  • Exercise: Delivery of the underlying asset or cash settlement
  • Expiry: When does the option right expire? Please note that your bank will not exercise a warrant unless specifically instructed to do so!
  • Last trading day: This date is often a bit earlier than the expiry date, so that it cannot be taken for granted that the option can be sold at any time up to the expiry date.

When trading in options and futures, the high chances of gain are counterbalanced by high chances of loss. As your bank, we believe it is our duty to inform you of the risks of options or futures contracts before you make such transactions.

Purchase of options
This means the purchase (opening = purchase for opening, long position) of calls (options to buy) or puts (options to sell), which entitles you to demand delivery or acceptance of the underlying security or, if that is impossible, as in the case of index options, you are entitled to demand payment of an amount of cash equal to the positive difference between the price of the underlying security at the time of purchase of the option and the market price at the time of exercise of the option. In the case of American-type options, the option may be exercised at any time before the agreed expiration date; in the case of European-type options, they can be exercised only on the agreed expiration date. In exchange for the grant of the option, you pay the option price (option premium). If the price changes in the opposite direction from what you hoped when you bought the option, your option may lose all its value by the expiration date. Your risk of loss is therefore the price you paid for the option.

Sale of options contracts and purchase or sale of futures contracts

Sale of Calls
This means the sale (opening = sale for opening, short position) of a call (option to buy), by which you assume the obligation of delivering the underlying security at a specified priced at any time before the expiration date (in the case of American-type call options) or on the expiration date (in the case of European-type call options). In exchange for assuming that obligation, you receive the option price. If the price of the underlying security rises, you must accept the risk of delivering the underlying security at the agreed price even if the market price is significantly higher than that price. That price difference constitutes your risk of loss, which cannot be determined in advance and in principle is unlimited. If the underlying securities are not in your possession (uncovered short position), you will have to purchase them through a cash transaction (replacement transaction) and your risk of loss in that case cannot be determined in advance. If the underlying securities are in your possession, you are protected against replacement losses and will also be able to make timely delivery. Since such securities must be kept blocked until the expiration date of your option transaction, however, you will not be able to dispose of them during that time, which means you cannot sell them to protect yourself against falling prices.

Sale of Puts
This refers to the sale (opening = sale for opening, short position) of a put (short position), by which you assume the obligation of purchasing the underlying security at a specified price at any time before the expiration date (in the case of American-type call options) or on the expiration date (in the case of European-type call options). In exchange for assuming that obligation, you receive the option price. If the price of the underlying security falls, you must accept the risk of buying the underlying security at the agreed price even if the market price is significantly lower than that price. That price difference, which is calculated on the basis of the exercise price minus the option premium, constitutes your risk of loss, which cannot be determined in advance and is in principle unlimited. An immediate sale of the securities will be possible only at a loss. If you do not wish to sell the securities immediately, however, and want to retain possession of them, you will have to pay the amount necessary to do so.

Sale or purchase of futures contracts
This refers to the purchase of sale of futures, by which you assume the obligation to accept or deliver the underlying value at the specified price at the end of the agreed term. If prices rise, you must accept the risk of having to deliver the underlying securities at the agreed price, even if the market price is significantly higher than that price. If prices fall, you will have to accept the risk of purchasing the underlying securities at the agreed price even if the market price is considerably lower. That price difference constitutes your risk of loss. In the case of an obligation to purchase, you must have all the necessary cash available at maturity. If the underlying securities are not in your possession (uncovered short position), you will have to purchase them through a cash transaction (replacement transaction) and your risk of loss in that case cannot be determined in advance. If the underlying securities are in your possession, you are protected against replacement losses and will also be able to make timely delivery.

Cash settlement transactions
If delivery or acceptance of the underlying securities is not possible in a futures transaction (e.g. in the case of index options or index futures), you will be required to pay a cash amount (cash settlement) if the market did not move in the direction you anticipated. The amount of that difference can be calculated from the difference between the price of the underlying security at the time you signed the option or futures contract and the market price at the time of exercise or maturity. That constitutes your risk of loss, which cannot be determined in advance and is in principle unlimited. In that case, you must ensure that you have sufficient liquid assets to cover the transaction.

Posting of security (Margins)
In the case of uncovered sale of options (opening = sale for opening, uncovered short position) or the purchase or sale of futures (future transactions), it is necessary to post security in the form of a “margin”.  You are required to post such security at the time of opening and whenever needed (if the price moves contrary to your expectations) at any time before the expiration of the option or futures contract. If you are not capable of posting the additional security that is required, we will unfortunately be forced to close out your position immediately and use the hitherto posted security to cover the transaction (see section 5(1) of the “Special Terms and Conditions for Options and Futures Transactions traded on the Stock Exchange or Over the Counter).

Liquidation of Positions
When trading in American-type options and futures contracts, you have the possibility of liquidating your position before the expiration date (Closing). You cannot always be sure that that will be possible at any time, however. It always depends very strongly on the market situation; in a difficult market, you may have to perform trades at an unfavourable market price, so that losses may be incurred.

Other Risks
Options entail both rights and obligations – futures contracts entail obligations only – with a short maturity and predetermined expiration or delivery dates. For those reasons, and because of the rapidity of such transactions, the following additional risks are created, in particular:

  • Options that are not exercised in a timely manner will expire and become worthless.
  • If you are unable to post the required additional security in a timely manner, we will liquidate your position and draw upon your previously posted security, without prejudice to your obligation to cover the outstanding balance.
  • In the case of option transactions (short position), we will perform the necessary steps for you without prior information in the event of allotment. We will not sell securities allotted because of the exercise of a put if there is insufficient cover.
  • If you perform futures transactions in foreign currency, an unfavourable trend in the foreign exchange market may increase your risk of loss.

Definition
Money-market instruments include certificated money market investments and borrowings such as certificates of deposit (CDs), cash deposit certificates, global note facilities, commercial paper as well as all notes with a maturity of up to five years for the repayment of principal and fixed interest rates for up to one year. Money market transactions also include genuine repurchase transactions and agreements.

Return and risk component
The return and risk components of money market instruments are largely equivalent to those of bonds/debentures. Differences relate mainly to the liquidity risk.

Liquidity risk
As a rule, there are no organised secondary markets for money market instruments. Consequently, it cannot be guaranteed that the instruments can be sold readily.

Liquidity risk becomes of secondary importance if the issuer guarantees payment of the invested capital at any time and is sufficiently creditworthy to do so.

Money market instruments – explained clearly:

Certificates of Deposit
Money market securities issued by banks, generally with a maturity of 30 to 360 days.

Public notes   
Money market securities issued by banks, generally with a maturity up to 5 years.

Commercial Paper     
Money market securities, short-term notes issued by major corporations, generally with a maturity of 5 to 270 days.

Global Note Facility   
A variation on the commercial paper facility that enables the issuing of commercial paper simultaneously in the USA and on markets in Europe.

Notes
Short-term capital market instruments, generally with a maturity of 1 to 5 years.

“Structured investment instruments” are investment instruments for which the return and/or repayment of capital are not generally fixed but rather depend on certain future events or developments. Moreover, such investment instruments may be structured in such a way that the issuer may call them in early if the product reaches the target value; in such cases, they be even be called in automatically.

This section will describe the individual product types. We will use generic terms to refer to these product types, but those terms are not used uniformly on the market. Due to the many possibilities of linking, combining and disbursement related to such investment instruments, they have developed a wide variety of different structures whose selected names do not always follow the structures uniformly. For that reason, it is always necessary to examine the specific terms and conditions of the product. Your customer adviser will be happy to inform you of the various structures of such investment instruments.

Risks:

  1. When the terms provide for payments of interest and/or dividends, such payments may depend on future events or developments (indexes, baskets, individual stocks, certain prices, commodities, precious metals, etc.) and may therefore be reduced or even eliminated in the future.
  2. Repayments of principal may depend on future events or developments (indexes, baskets, individual stocks, certain prices, commodities, precious metals, etc.) and may therefore be reduced or even eliminated in the future.
  3. With respect to payments of interest and/or dividends as well as repayments of principal, it is necessary to take into account interest risk, currency risk, corporate risk, sector risk, country risk and credit risk (and possibly a lack of secured creditor rights and no claim for separation and recovery of assets not belonging to the bankrupt estate) as well as tax risks.
  4. The risks defined by paragraphs 1) through 3) above may lead to strong price fluctuations (price losses) during the term of the instrument regardless of any guarantees of interest, earnings, or principal; such risks may also make it difficult or impossible to sell the instrument before it reaches maturity.

Interest Spread Securities Products (Constant Maturity Swaps)
These products, which are structured like debt securities, initially feature a fixed coupon. After the fixed-interest phase, the products are converted to a variable interest rate. The coupon, which is generally annual, depends on the current interest situation (e.g. the interest curve). In addition, such products may involve target interest rate variant; i.e. if a predetermined target interest rate is achieved, the product will be called in early.

Return
In the fixed-interest phase, the investor generally obtains a higher coupon than with conventional bonds on the market. In the variable-interest phase, investors have the opportunity of achieving higher coupons than from fixed-interest bonds.

Risk
Before maturity, market-related price fluctuations may occur. Such fluctuations may prove significant, depending on the interest rate trend.

Guaranty certificates
When guaranty certificates reach maturity, they pay out the initial face value or a certain percentage thereof regardless of the performance of the underlying security (“minimum redemption”).

Return
The maximum return obtainable from the performance of the underlying security may be limited by a maximum redemption price or other restrictions on participation in the performance of the underlying security established in the terms and conditions of the certificate. The investor is not entitled to dividends and similar distributions on the underlying security.

Risk
The value of the certificate before maturity may fall below the agreed minimum redemption price before maturity. At maturity, the value will generally be at the level of the minimum redemption price, however. The minimum redemption price depends on the issuer’s creditworthiness.

Twin Win certificates
When Twin Win certificates reach maturity, the issuer pays out a redemption price that depends on the performance of the underlying instrument. The certificates have a barrier. If (as a general rule) the price does not reach or falls below the barrier of the Twin Win certificate before it matures, the investor shares in the absolute performance of the underlying instrument starting from the base price set by the issuer; this means that even price losses of the underlying instrument may translate into gains on the certificates. If the price reaches or falls below the barrier of the Twin Win certificate before maturity, the certificate will be redeemed at a price at least equal to the current price trend of the underlying instrument. The issuer may stipulate that disproportionate sharing in the performance of the underlying instrument is possible above the base price. There may be a limit on the maximum redemption price, however.

Return
If the price does not reach the barrier, the investor may also profit from the negative performance of the underlying instrument, since he shares in the absolute performance; price losses in the underlying instrument may therefore translate into gains. The certificate may react more or less strongly to the price fluctuations of the underlying instrument depending on various influencing factors (e.g. volatility of the underlying instrument, time to maturity, distance of the underlying instrument from the barrier).

Risk
Twin Win certificates are risky investment instruments. If the price of the securities underlying the Twin Win certificate changes unfavourably, all or much of the invested capital may be lost.

Express certificates
An express certificate lets the investor share in the performance of the underlying instrument with the option of early redemption. If on one of the determination dates the underlying instrument satisfies the trigger criterion specified by the issuer, the certificate expires early and will be automatically redeemed by the issuer at the redemption price applicable on the determination date in question. If the underlying instrument does not satisfy the specified trigger criterion even on the final determination date, the certificate will be redeemed at the closing price of the security underlying the certificate established at maturity/on the final determination date. In that case, if the issuer set a barrier at the start of the issue of the certificate and the price of the underlying instrument neither reaches nor breaks through the barrier during the observation period, the certificate will be redeemed at a price at least equal to the minimum redemption price defined by the issuer.

Return
Express certificates offer the possibility of early realisation of the positive performance of the underlying instruments. Even if the specified trigger criterion is not satisfied, there may be a payout of the minimum redemption price, if the barrier has not been reached or broken through.

The certificate may react more or less strongly to the price fluctuations of the underlying instrument depending on various influencing factors (e.g. volatility of the underlying instrument, time to maturity, distance of the underlying instrument from the barrier).

Risk
Express certificates are risky investment instruments. If the price of the securities underlying the Express certificate changes unfavourably, all or much of the invested capital may be lost.

Discount certificates
In the case of discount certificates, the investor receives the underlying security (e.g. the underlying stock or index) at a discount off the current price (safety buffer) but in exchange his interest in the growth of the underlying security is limited to a certain ceiling (cap or reference price). At maturity, the issuer has the option of either redeeming the certificate at the maximum value (cap) or delivering stocks or, if an index is used as the underlying security, a cash settlement equal to the index value.

Return
The difference between the discounted purchase price of the underlying security and the price ceiling determined by the cap represents the possible return.

Risk
If the price of the underlying security falls sharply, shares will be delivered when the instrument reaches maturity (the equivalent value of the delivered shares will be below the purchase price at that time). Since allocation of shares is possible, it is necessary to take into account the risk notification for shares.

Bonus certificates
Bonus certificates are debt securities that, subject to certain requirements, pay out at maturity a bonus or appreciated price of an underlying security (individual shares or indexes) in addition to the nominal value. Bonus certificates have a fixed maturity. The terms and conditions of the certificate regularly stipulate the payment of cash or delivery of the underlying security at maturity. The type and price of redemption at maturity depend on the price performance of the underlying security.

Three levels are set for a bonus certificate: a starting level, a barrier underneath the starting level, and a bonus level above the starting level. If the underlying security falls down to the barrier or below, the bonus is forfeited and the certificate will be redeemed at the price of the underlying security. Otherwise, the minimum redemption price results from the bonus level. When the certificate reaches maturity, the bonus is paid out along with the amount initially paid for the face value of the certificate.

Return
With a bonus certificate, the investor acquires a money claim against the issuer for payment of an amount determined by the performance of the underlying security.

Risk
The risk depends on the underlying security. If the issuer goes bankrupt, the investor has no secured creditor rights or claim for separation and recovery of assets not belonging to the bankrupt estate with respect to the underlying security.

Cash or Share-Bonds (reverse convertible bonds)
These consist of the components, whose risk is borne by the bond purchaser:

The investor purchases a bond (the bond component) whose interest rate includes an option premium. This structure therefore results in a higher interest rate than a comparable bond with the same maturity. The bond may be redeemed either in cash or in shares, depending on the price trend of the underlying stock (stock component).

The bond purchaser is therefore the writer of a put option (option component) that sells to a third party the right to sell shares to him; in so doing, the bond purchaser agrees to accept the consequences if the share price changes in a direction that is contrary to his interests. The bond purchaser there bears the risk of the price trend; in exchange, he receives a premium, the amount of which basically depends on the volatility of the underlying stock. If the bond is not held to maturity, that risk is compounded by interest rate risk. A change in the interest rate will affect the bond’s price and thus the bond’s net yield relative to its maturity.

Please also see the corresponding risk notification in the sections on credit risk, interest rate risk, and price risk of shares.

Hedge funds
(Hedge funds, hedge funds of funds, hedge fund index certificates, and other products with hedge strategies as the underlying investment)

General information
Hedge funds are funds that are subject to few or no restrictions of a statutory or other nature with respect to the principles of investment. They endeavour to use all forms of investment to increase their capital through alternative, sometimes non-transparent investment strategies.

Examples of investment strategies:

  • Long/Short: Undervalued securities are bought and overvalued securities are simultaneously sold short.
  • Event-Driven: The objective is to take advantage of specific corporate events such as mergers, acquisitions, reorganisation or bankruptcy.
  • Global Macro: This style attempts to use macroeconomic analysis of major economic and political trends in order to identify and exploit market inefficiencies.

Hedge funds of funds are funds that invest in individual hedge funds. Hedge fund index certificates are debt securities whose price and performance trend depend on the average trend of several hedge funds that are combined into a single index to provide a basis of calculation. Hedge funds of funds and hedge fund index certificates offer investors the advantage of improved risk diversification.

Return and risk components
Hedge funds offer an opportunity for very high returns, but the risk of losing your invested capital is correspondingly high. The price trend of hedge fund products is especially influenced by the following factors, which generate opportunities and risks:

  • Hedge funds trends tend to be independent from international stock and bond market trends; depending on the hedge fund strategy the general market trend may either be exaggerated or result in a pronounced trend in the opposite direction.
  • Hedge fund trends are particularly influenced by their market share.
  • Due to their components, hedge fund assets may be highly volatile, which means that the share prices may be subject to significant upward and downward fluctuations within short periods of time. In extreme cases, unsecured hedge fund products may lead to a total loss.
  • Concentrating on just one strategy or only a few exacerbates the risk– that risk may be reduced through diversification in the case of hedge funds of funds or hedge fund index certificates.
  • The manager of the fund of funds selects the individual funds and their composition in keeping with the fund’s desired risk/return profile or according to a system of distribution among various countries and sectors determined by an index committee.
  • It is impossible for the underlying hedge funds to be transparent at all times to the fund of fund management/index committee.

Liquidity risk
Since hedge funds require complex strategies and are difficult to manage, it takes longer to determine the price of a hedge fund product than with traditional funds. Hedge fund products are therefore less liquid than traditional funds. The prices are generally determined on a monthly rather than daily basis, so that shares can frequently be redeemed only once a month. To be able to return the shares at the time, the investor must give an irrevocable declaration of intent to return his shares well in advance of the redemption date. The share price may change significantly between the time of the declaration of intent to return the shares and the time of redemption, but the investor does not have the right to such price changes since his declaration of intent is irrevocable. The specific terms of redemption depend on the individual product. The limited liquidity of the individual funds and instruments can therefore decrease the negotiability of hedge fund product.

CTA (Commodity Trading Advisor)
Most CTAs use fully automated systems for trading in derivatives, i.e. computer programs, which reach decisions automatically. The goal is to predict up to a certain extent specific trends and future market developments from the study of the immediate past.

Return
Earnings are made up of the profits generated from investment decisions reached automatically and that are gained from the exploitation of the trends recognized.

Risk
The risk consists of a failure of the predicted trends to materialize or of the automated trading system failing to recognize a trend.

Index certificates
Index certificates are debt instruments (usually publicly quoted) that offer investors the possibility of acquiring an interest in a certain index without having to own the securities contained in the index. The underlying index is generally represented on a 1:1 basis; changes in the relevant index are taken into account.

Return
With an index certificate, the investor acquires a money claim against the issuer for payment of an amount that depends on the level of the underlying index. The return depends on the performance of the underlying index.

Risk
The risk depends on the securities underlying the index.

If the issuer goes bankrupt, the investor has no secured creditor rights or claim for separation and recovery of assets not belonging to the bankrupt estate with respect to the underlying security.

Basket certificates
Basket certificates are debt instruments that offer investors the opportunity to acquire an interest in the performance of a certain securities basket without having to own the securities contained in the basket. The composition of the underlying basket is up to the issuer. The various securities in the basket may be weighted equally or differently. The composition may be adjusted at specified times (e.g. annually).

Knock-out certificates (Turbo certificates)
The term “knock-out-certificate” means a certificate that evidences the right to buy or sell a certain underlying security at a certain price if the underlying security fails to reach the specified price threshold (knock-out threshold) before maturity. If it does reach the threshold level, the certificate will expire early and most of the investment will generally be lost. Depending on the price trend of the underlying security, a distinction is made between knock-out long certificates, which bank on a bull market, and knock-out short certificates, which are especially designed for bear markets. Besides normal knock-out-certificates, “leveraged” knock-out certificates are issued, usually under the name of “turbo certificates” (or leverage certificates).

When the price of the underlying security rises, the increase in the value of the turbo certificates will be disproportionately greater due to the lever (turbo) effect; the same effect occurs in the opposite direction when prices fall, however. Thus, high gains can be earned through small investments, but the risk of loss is increased, as well.

Return
A positive return can be earned if there is a favourable difference between the acquisition price or market price and the exercise price (making it possible to buy the underlying security at the lower exercise price or to sell it at the higher exercise price).

Risk
If the knock-out threshold is reached before maturity, either the certificate expires and becomes worthless or an estimated residual value is paid out (the product is “knocked out”). In the case of certain issuers, it suffices to knock out the certificate if the price reaches the knock-out level during the trading day (intraday). The closer the current stock market quotation is to the exercise price, the stronger the leverage effect. At the same time, however, the risk increases that the price will fall below the knock-out threshold and either the certificate will become worthess or the estimated residual value will be paid out.

Spread certificates
Spread certificates offer investors the possibility of sharing disproportionately in the performance of the underlying security in expectation of a share price or index varying within a certain price range (spread) defined by a starting point and a stopping point.

Return
A return can result from the share that is disproportionate to the performance of the underlying security.

Risk
If the final price established on the value date is below the starting point, the certificate will merely represent the price performance of the underlying security. If the price falls below the stopping point, the investor receives a fixed maximum redemption price at maturity with no right to share in the price increase.