Tutorial: Factor certificates

What are factor certificates?

With a factor certificate long/short investors can use a constant factor (= leverage) to invest in different markets. Factor certificates have no knock-out barrier. Therefore the certificate cannot knock out. Disproportionate losses are still possible due to the factor. The calculation of the certificate is done on a daily basis.

Erste Group factor certificates are issued with a stop-mechanism (stop-loss buffer). This means that the calculation of the certificate stops in case of large losses (when the stop-loss barrier is broken) and a new day is simulated. In this case, intraday adjustments are made for the stop-loss barrier, the previous reference price and the previous cash amount.

There are factor certificates long and factor certificates short. A factor certificate long benefits from rising prices of the underlying. A factor certificate short benefits from falling prices of the underlying.

How do factor certificates work?

The factor certificate is directly linked to the underlying. This may be a stock, an index or a commodity.

The following example explains how factor certificates work:
The underlying index rises constantly by 2% on 3 consecutive days. Thus, there is an index value increase of approx. 6%. The factor certificate starts at an issue price of 100 EUR and is issued with factor 2. Factor 2 means that each day twice the performance (positive and negative) is achieved. If there was no daily adjustment, performance of the certificate of 12% can be expected (6% = 2 * value of the underlying). Due to the daily adjustment the factor certificate has a value of 104 EUR on the first day. This value is the basis for the following day. On the second day the certificate thus has a value of 108.16% and 112.49% on day three. Thus, the increase is higher due to the daily adjustment. However, incurred losses cannot be fully offset by the same positive performance.

Your benefits

Active and market-oriented investors regard factor certificates long/short as an interesting investment to benefit disproportionately, especially in trend phases.

Your advantages

  • With a factor certificate long you profit from rising prices of the underlying, with a factor certificate short you profit from falling prices of the underlying.
  • With factor certificates you can accompany short-term price changes or trend phases with a leverage.
  • There is no initial charge for the purchase of factor certificates.

Details you should be aware of

  • A total loss of invested capital is possible.
  • The leverage effect may lead to disproportionate losses.
  • The risk of issuer is to be considered.

How do factor certificates react to…

… rising markets?
In rising markets the price of a factor certificate long rises / the price of a factor certificate short falls disproportionately compared to the underlying in accordance with the leverage chosen.

… stable markets?
In stable or sideways markets a factor certificate may perform worse than the underlying.

… falling markets?
In falling markets the price of factor certificate long falls / the price of a factor certificate short rises disproportionately compared to the underlying in accordance with the leverage chosen.


Sample Calculation