Download Description of Investment Instruments and Warning of

Description
of Investment
Instruments and
Warning of Risks
Effective as of
28 February 2013
Description of Investment Instruments and Warning of Risks
Sberbank CZ, a.s. as the securities broker (hereinafter referred to as the “Bank“)
Introduction
In this text, various investment instruments and risks related
to them are described.
Under the “risk“ term is meant not reaching the expected return
on an invested capital and/or loss of the invested capital up to
its total loss, while different causes may be basis of this risk lying
in investment instruments, markets or issuers – according to
the structure of investment instrument. Since these risks are
not always foreseeable, the following description must not be
considered as final.
The risk arising from financial standing of the issuer of the investment instrument is dependent on individual case; the investor
should therefore pay close attention to it.
Description of investment instruments follows usual features
of investment instruments. The decisive factor is the structure
of a specific investment instrument. For that reason, the following description is no substitute for a thorough examination of the
specific investment instrument by the investor.
1. General investment risks
Currency risk
If a trade in foreign currency is selected, then its yield, resp. value
development of this trade, depends not only on the local yield
of the security on the foreign market, but also heavily on the
exchange rate development of the respective foreign currency
in relation to the currency of the investor (e.g. CZK). This means
that exchange rate fluctuations may increase or decrease the
yield and value of the investment.
Transfer risk
When trading with incomes from abroad (e.g. foreign debtor)
there exists – depending on a relevant country – an additional
risk lying in prevention or difficulty to realize an investment
project by political or currency-legal provisions. In addition,
problems may also occur at proceeding an instruction. In case
of trades in foreign currency such measures may obstruct the
free convertibility of the currency.
Financial standing risk
Under the “financial standing risk“ term is meant the risk following from insolvency of a partner, i.e. potential inability
to meet their obligations such as dividend payments, interest
payments, installment payments, etc. on the appointed date
or in full extent. The alternative terms for the “financial standing
risk“ are debtor’s risk or issuer’s risk. This kind of risk can be
graded by means of “rating”. Rating is an evaluation scale used
for appraisal of financial standing of emitters. Rating is compiled
by rating agencies, particularly the financial standing risk and
country risk is being estimated. The rating scale ranges from
“AAA” evaluation (the best financial standing) to “D” (the worst
financial standing).
Interest rate risk
Interest rate risk follows from the possibility of future changes
of interest rate levels on the market. Rising level of market
interest rates during maturity of fixed interest bonds leads to
exchange rate losses, a fall in such interest rates leads to exchange rate gains.
Exchange rate risk (volatility)
Under the “exchange rate risk” term is meant potential variation
(volatility) of value of individual investment or specific structure
of cash flow. The exchange rate risk at trades with conditional
obligations (e.g. currency forward deals, futures, option subscribing) can lead to necessity of increasing security (Margin),
resp. to put up further margin, i.e. tying up liquidity.
Risk of total loss
Under the “risk of total loss” is meant a risk, that investment can
become completely worthless. Total loss can occur, particularly,
when the issuer of a security is no longer capable of meeting
their payment obligations (insolvent), for economic or legal reasons.
Securities purchase on credit
The purchase of securities on credit poses an increased risk. The
received credit must be paid independently of the success of the
investment. Furthermore, the credit costs reduce the yield.
Country risk
Placing an instruction
The country risk is a financial standing risk of a given state. If the
relevant state represents political or economic risk, it may have
negative influence on all partners with registered office in this
state.
The instructions for the Bank to purchase or sell (placing an
instruction) must minimally contain indication of the investment
instrument, the quantity (number of pieces/nominal value),
minimal/maximal price and period of time, during which the
instruction is valid.
Liquidity risk
Liquidity refers to the possibility of buying or selling a security
or closing out a position at the current market price at any
time. The market in a particular security is said to be liquid
if an average sell instruction (measured by the usual trading
volume) does not cause perceptible price fluctuations and if the
instruction cannot be settled at all or only at a substantially
changed rate level.
Effective as of 28 February 2013
Market order
If buy or sell orders are placed with the instruction “at best” (no
price limit), deals will be executed at the best possible price.
In this way, the financial requirements purchase/gains remain
uncertain.
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Description of Investment Instruments and Warning of Risks
Price limit
With a buy limit, you may limit the purchase price of a stock
exchange instruction or of other market and thus limit the
amount of the employed capital. No purchases will be made
above the price limit. A sale limit stipulates the lowest acceptable
selling price; no deals will be carried out below this price limit.
At certain foreign stock exchanges, the trading hours still do not
comply with European standards. Short trading hours of stock
exchange of only three or four hours per day can lead to time
pressure, resp. to not taking into account instructions concerning shares.
2. Bonds
Stop loss order
Definition
A stop-loss order will not be executed until the price reaches
the selected stop-limit. The price actually obtained may therefore differ from the selected stop-limit, especially in the case
of a market with lower liquidity.
Bonds are securities that obligate the issuer (= debtor, issuer)
to pay the bondholder (= creditor, buyer) interest on the capital
invested and to repay it according to the bond terms. Besides
such bonds in the strict sense of the term, there are also bonds
that differ significantly from the above-mentioned characteristics and the description given below. We refer in particular
to the bonds described in the “Structured investment instruments” paragraph. Especially in that area, it is not the definition
as a bond that is decisive for the investment instrument risk but
rather the specific structure of the investment instrument.
Time limit
You can set a time limit to determine the validity of your instruction. The period of validity of instruction without time limit
depends on the practices of the respective exchange place.
Your advisor will inform you on further additions of the instruction.
Guarantees
The term “guarantee” may have several meanings. On the one
hand, under this term is meant a commitment of a third person
other than the issuer, through whom the third person ensures
fulfillment of the issuer’s obligation. On the other hand, it can
be a commitment of the issuer themselves to perform a certain
performance regardless of the trend in certain indicators, that
would be decisive for the extent of the issuer’s obligation. Guarantees may also be related to various other circumstances.
Capital guarantees are usually enforceable only until the end
of term (repayment) that is why 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 financial
standing.
Tax aspects
Yield
The bond yield is composed of the interest on capital and potential difference between the purchase price and the price achieved
at sale/redemption.
Consequently, the yield can only be determined in advance if the
bond is held until maturity. With variable interest rates of bonds,
the yield cannot be specified in advance. As comparative/measuring value for the yield, yield up to maturity is used (final maturity), which is calculated according to usual international criteria. Bond yields which are significantly above the generally
customary level of bond yields with comparable maturity should
always be questioned, with an increased financial standing risk
being a possible reason.
The price achieved when selling a bond prior to redemption is not
known in advance. Consequently, the yield may be higher or
lower than the yield calculated initially. Thus when calculating
the yield, the fees must be taken into account.
Your advisor will provide you with information on the general
tax aspects of the individual types of investment. The impact of
an investment on your personal tax situation should be evaluated together with your tax advisor.
Financial standing risk
Risks at stock exchanges, particularly on foreign
markets
A method of assessment of the debtor’s financial standing risk
may be the so called rating (= assessment of the debtor’s financial standing risk by an independent rating agency). Rating “AAA”,
resp. “Aaa” means the best financial standing risk; the worse
rating is (e.g. rating B- or C), the risk of default (financial standing risk) is higher but by way of compensation the instrument
generally pays a higher interest rate (risk premium). Investments
with a rating comparable to BBB or higher are generally referred
to as “Investment grade”.
There is no direct connection with most of the foreign stock
exchanges, it means, that all instructions must be passed telephonically. This can lead to mistakes or time delays.
In case of certain foreign share stock exchanges limited instructions for purchase and sale are generally not possible. The limited instructions cannot be given until the request has been
made via telephone to the local broker, which can lead to time
delays. In certain cases, such limits cannot be executed at all.
At certain foreign share stock exchanges it is complicated
to receive the current exchange rates, which makes it more
difficult to assess the Client’s existing positions.
If a trading quotation is discontinued on stock exchange, it may
no longer be possible to sell these securities through the relevant
purchase stock exchange. A transfer to another stock exchange
may also cause problems.
Effective as of 28 February 2013
There is always the risk that the debtor is unable to meet all
or part of their obligations, e.g. in case of insolvency. Therefore,
the financial standing risk of the debtor must be considered
in your investment decision.
Exchange rate risk
If a bond is held until the end of maturity, at its redemption you
receive an amount, which you were promised in the bond terms.
Please note – if it is stated in the issue terms – the risk of early
calling-in by the issuer.
If the bond is sold prior to its maturity, you shall receive the
market price. This price is regulated by supply and demand,
which among others depends on the current interest rate level.
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Description of Investment Instruments and Warning of Risks
For example, the price of fixed interest bonds will fall, if the
interest on bonds with comparable maturities rises, and reversely, bonds will gain in value, if the interest on bonds with
comparable maturities falls.
A change in the debtor’s financial standing may also affect the
bond price.
In case of variable-interest bonds whose interest rate is indexed
to the capital market rates, the interest rate risk is comparably
higher than with bonds whose interest rate depends on the
money market rates.
The degree of change in the bond price in response to change
in the interest level is described by the “duration” indicator. 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, both in a positive and negative sense.
Liquidity risk
The tradability of bonds may depend on several factors, e.g. issuing volume, remaining time to maturity, stock exchange rules,
market situation. Bonds which are difficult to sell or cannot be
sold at all must be held until maturity.
Trading with bonds
Bonds are traded on a stock exchange, or over-the-counter.
On the basis of your requirement, your bank may usually inform
you on the selling and purchase price of certain bonds. However, there is no entitlement for negotiability.
In case of bonds that are also traded on the stock exchange,
the prices formed on the stock exchange may differ considerably from the off-the-market quotations. The risk of the worse
price on the stock exchange may be reduced by placing a limit
in the instruction.
3. Shares/Stocks
Definition
Shares are securities, with which rights of a shareholder as
a partner to participate on the company’s management, its
profit and liquidation balance at the company dissolution are
connected and a right to vote at the general meeting. (Exception: priority shares)
Yield
The yield from investment into shares is composed of dividend
payment and exchange rate gains/losses and cannot be predicted with certainty. The dividend is a yield of a company paid
on the basis of the general meeting decision. The dividend amount
is expressed either as an absolute amount per share or as a percentage of the nominal value. The yield obtained from the dividend in relation to the exchange rate of shares is called dividend
yield. It is usually considerably lower than the dividend indicated
as a percentage of the nominal value.
The greater part of yields from investments into shares follows
regularly from development of value/share exchange rate (see
exchange rate risk).
Exchange rate risk
basis of supply and demand. Investments into shares may lead
to considerable losses.
In general, the share exchange rate depends on the economic
development of a company, as well as the general economic
and political frame conditions. Besides, irrational factors (investor sentiment, public opinions) may also influence the exchange
rate and thus the yield on an investment.
Financial standing risk
As a shareholder, you own participation on a company. Your
participation may become valueless particularly by its insolvency
Liquidity risk
Tradability may be problematical in cases of titles seldom occurring on the market (mainly quotation on unregulated markets,
over-the-counter trades).
Also quotation of one share in several stock exchanges may lead
to differences in tradability on different international stock
exchanges (e.g. quotation of an American share in Frankfurt).
Stock market
Stocks are traded on a stock exchange, sometimes over-thecounter. In the case of stock exchange trading, the relevant
stock exchange rules (trading volume, type of instructions, currency adjustment, etc.) must be observed. If a share is quoted
at different stock exchanges in different currencies (e.g. an American share quoted in Euros at the stock exchange in Frankfurt)
it entails an exchange rate risk, as well as a currency risk. Your
advisor will inform you of further details.
When purchasing a stock on a foreign stock exchange, please
bear in mind that foreign stock exchanges always charge fees
of third parties that accrue in addition to the bank’s usual fees.
You will be informed on their exact amount by your advisor.
4. Mutual funds
I. Domestic mutual funds
Generally
The mutual funds of the domestic investment funds are securities which certify co-ownership in the mutual fund. Mutual
funds invest money of owners in accordance with the principle
of risk diversification. The three main types 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 investment spectrum of domestic mutual funds includes
not only securities but also money market instruments, liquid
financial investments, derivative investment instruments and
mutual fund shares. Mutual funds may invest into domestic
and foreign securities.
Furthermore, we distinguish among distribution funds (paying
dividends), growth funds (which do not pay dividends) and funds
of funds. Unlike funds paying out dividends, 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. Guarantee 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 capital, or performance.
Share is a security, which in most cases is tradable on a stock
exchange. The exchange rate is usually established daily on the
Effective as of 28 February 2013
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Description of Investment Instruments and Warning of Risks
Yield
Yield
The yield of investment fund is composed of the annual payment
(provided they are distribution not growth funds) and the trend
in the value of the fund assets. The yield cannot be established
in advance. The trend in value of the fund assets depends on the
investment policy specified in the fund terms, as well as the
market trends of the individual parts of the fund. Depending
on the composition of a fund portfolio, the relevant risk warning
notices for bonds, stocks or warrants must be taken into account.
The yield depends on the trend of the underlying assets found
in the securities basket.
Exchange rate risk/Pricing 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 proceeds. Your investment advisor 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 investment over a prolonged period of time.
Like stocks, funds can be traded on stock exchanges. The rates
that are formed on the relevant stock exchange may differ from
the redemption price. In that regard please see the information
on risk related to stocks.
Tax impacts
The tax adjustment of yields is different depending on the type
of the fund.
II. Foreign investment funds
Foreign investment funds are subject to the foreign legal provisions, which can noticeably differ from legal provisions valid
in the Czech Republic. In particular, the power of supervisory
body may be often less strict than as it is in inland.
On the investment fund market, 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.
Please keep in account that the dividend payments and yields
of the foreign capital investment funds amounting to the paid
dividends (e.g. growth fund) – regardless of their legal form – are
subject to other tax adjustments.
III. Exchange Traded Funds (Index certificates)
Exchange Traded Funds (ETFs – index certificates) are fund
shares that are traded like stocks on a stock exchange. An ETF
is usually compound from a basket of securities (e.g. a basket
of stocks) that reflects the composition of an index, i.e. that copies the index in one security by means of the securities contained in the index and their current weight, and so that ETFs
are often referred to as index stocks.
Effective as of 28 February 2013
Risk
The risk depends on values of the securities basket, which forms
the basis of securities.
5. Structured investment instruments
The “structured investment instruments” are investment instruments or treasury solutions for which the yields and/or
repayment of capital are not generally fixed but rather depend
on certain future events or market development. Such instruments may be, for example, structured in such a way that the
issuer may call them in early if the investment instrument reaches the target value; in such cases, they would even be called
in automatically.
Subsequently, individual types of investment instruments will be
described. For description of these types of investment instruments, common collective terms are used, that are not, however,
used uniformly on the market. On the basis of various possibilities of connections, combinations and disbursements related
to such investment instruments, various forms of investment
instruments have developed; names selected for them do not
always reflect the relevant forms uniformly. For that reason, it is
always necessary to examine specific terms and conditions
of the investment instrument. Your advisor will be happy to
inform you of the forms of such investment instruments.
Risk
1)
When the interest and/or yield payments are agreed, such
payments may depend on future events or development
(indexes, baskets, individual stocks, specific prices, commodities, precious metals, etc.) and may therefore be reduced or even eliminated in the future.
2) Capital repayments may depend on future events or developments (indexes, baskets, individual stocks, specific
prices, commodities, precious metals, etc.) and may therefore be reduced or even eliminated in the future.
3) In respect to the interest and/or yield payments as well as
capital repayment, it is necessary to take into account
mainly interest, currency, company, branch risks and country risk and financial standing risks (and possibly a lack of
claims for separation and elimination) as well as tax risk.
4) The risks mentioned in sections 1) to 3), without regard to
the potential interest, yield or capital guarantees, may lead
to strong exchange fluctuations (exchange rate losses), resp.
such risks may also make it difficult or impossible to sell
the instrument before it reaches maturity.
I. Guarantee certificates
When guarantee certificates reach maturity, they pay out initial
nominal value or a certain percentage rate independently of
development of the underlying asset (“minimal paid amount”).
Yield
The yield attainable from development of the underlying value
may be limited by the highest paid amount or by other limitations of participation on development of the underlying asset
Page 04 of 13
Description of Investment Instruments and Warning of Risks
that are stated in the certificate terms. The investor is not entitled to receive dividends and similar payments of the underlying
asset.
Risk
The risk depends on the derived underlying security. If the issuer goes bankrupt, the investor has no rights or claim for separation and recovery with respect to the underlying security.
Risk
The value of the certificate may fall below the agreed minimal
paid amount during maturity. But at the end of maturity, the value will generally be at the amount of the minimal paid amount.
However, the minimal paid amount depends on financial standing of the issuer.
IV. Index certificates
Index certificates are bonds (usually quoted in the stock exchange) that offer investors the possibility to participate on
a certain index, without having to own the values contained
in the given index. Changes in the underlying security (index)
and index certificate are in 1:1 ratio.
II. Discount certificates
In the case of discount certificates, the investor receives the
underlying asset (e.g. derived stocks or index) at a discount
of the current price (safety buffer) but in exchange his interest
in 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.
Yield
With an index certificate, the investor acquires a claim against
the issuer for payment of a sum that depends on the state of the
derived index. The yield depends on development of the derived
index.
Risk
The risk depends on the derived values of the index.
Yield
The difference between the discounted purchase rate of the
underlying security and the upper limit of the rate determined
by Cap represents the possible yield.
Risk
If the price of the underlying asset 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 moment). Since allocation of shares is possible, it is necessary to take into account the risk warnings concerning the
shares.
III. Bonus certificates
Bonus certificates are bonds that, subject to certain requirements, pay out at maturity a bonus or appreciated price of an
underlying asset (individual shares or indexes) in addition to the
nominal value. Bonus certificates have fixed given maturity.
The terms and conditions of the certificate stipulate regular
payment of the financial amount or provision of the underlying
assets at the end of maturity. The type and amount of sum paid
at the end of maturity depend on development of the value of
the underlying assets.
For a bonus certificate there is set a starting level, a barrier being
underneath the starting level, and a bonus level being above
the starting level. If the underlying security falls down to the
barrier, or below, the bonus is forfeited and the paid sum will
be in the amount of the underlying security. Otherwise, the
minimal paid amount results from the bonus level. When the
certificate reaches maturity, the bonus is paid out along with
the amount initially invested capital for the nominal value of the
certificate.
Yield
With a bonus certificate, the investor acquires a claim against
the issuer for payment of a money amount depending on the
value of the underlying security. The yield depends on development of the derived underlying security.
Effective as of 28 February 2013
If the issuer goes bankrupt, the investor has no right or claim for
separation or recovery of the underlying securities.
V. Knock-out-certificates (turbo-certificates)
Under the “Knock-out-certificates” term are meant certificates
that guarantee the right to buy, event. to sell a certain underlying security at a certain exchange rate, if the underlying
security fails to reach the specified limit of the exchange rate
(Knock-out-limit) before maturity. If it does reach the specified
limit, the certificate will expire early and most of the investment
will generally be lost. Depending on the expected development
of the exchange rate with respect to the relevant underlying
security, a distinction is made between Knock-out long certificates and Knock-out short certificates. Besides normal Knockout certificates, “leveraged” Knock-out certificates are issued,
usually under the name of “Turbo certificates” (or leverage certificates).
When the value of the underlying security rises, the increase
in the value of the Turbo certificates will be disproportionately
greater due to the level (Turbo) effect; the same effect occurs
in the opposite direction when prices fall, however. Thus, high
yields can be earned through small investments, but the risk of
loss is increased, as well.
Yield
A positive yield can be earned if there is a favorable 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 limit is reached before maturity, either the
certificate expires and becomes worthless or an estimated residual value is paid out (investment instrument will be due). In case
of certain issuers, it suffices to knock out the certificate if the
price reaches the Knock-out limit during the trading day (intraday). The closer the current stock market quotation is to the
exercise price, the stronger the leverage effect is. At the same
time, however, the risk that the price will fall below the KnockPage 05 of 13
Description of Investment Instruments and Warning of Risks
out limit increases and either the certificate will become worthless or the estimated residual value will be paid out.
6. Money market instruments
Definitions
Money instruments include short-term investments in the financial market, as for example certificates of deposit (CDs),
treasury bills, and all short-term bonds with maturity of the
capital approximately up to five years and fixed interest rates
approximately up to one year.
Parts of yield and risk
The parts of yield and risk of money market instruments are
largely equivalent to those of bonds. Differences relate mainly
to the liquidity risk.
Liquidity risk
There are no organized secondary markets for money market
instruments. Consequently, it cannot be guaranteed that the
instrument can be sold at any time.
Liquidity risk becomes of secondary importance, if the issuer
guarantees payment of the invested capital at any time and his
financial standing is for such purposes sufficient.
Instruments of the financial market – elementary explanation
Certificates of Deposit – securities of the financial market issued by banks, generally with a maturity from 30 to 360 days.
Sale of option contracts and purchase or sale of futures
contracts
Sale of Calls
This means the sale (Opening = sale when opening, short position) of a Call (option to buy), by which you assume the obligation of delivering 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 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 you 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 that you cannot sell them to protect yourself
against falling prices.
Sale of Puts
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.
This refers to the sale (Opening = sale when 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 option). 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 underlying securities will be possible only at a loss.
If you do not wish to sell the underlying securities immediately,
however, and want to retain possession of them, you will have
to take into consideration costs of needed funds.
Option purchase
Sale or purchase of futures contracts
This means the purchase (Opening = purchase when 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 possible, 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
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.
This refers to the purchase or sale at a specified date , by which
you assume the obligation to accept or deliver the underlying
asset 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.
Treasury Bills – securities of the financial market with a maturity up to 1 year.
Commercial Papers – instruments of the financial market,
short-term bonds issued by big companies, with a maturity
from 5 to 270 days.
Short-term bonds – short-term securities of the capital market, generally with a maturity from 1 year to 5 years.
7. Security derivatives (options and futures
contracts)
Effective as of 28 February 2013
Page 06 of 13
Description of Investment Instruments and Warning of Risks
Cash Settlement transactions
Yield
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 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.
The yield (profit/loss) achieved by speculative investors is the
difference between the foreign exchange rates during or at the
end of maturity of the futures transaction in line with the contract specifications.
Provision of security (Margins)
In the case of uncovered sale of options (Opening = sale when
opening, uncovered short position) or 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 be unfortunately
forced to close out your position immediately and use the
hitherto posted security to cover the transaction (see article 3
section 2 of the “General contract on Closing Deals with Investment Instruments”).
The use of currency futures for hedging purposes means locking
in an exchange rate so that the costs of the hedged transaction
as well as its yield will neither increase nor decrease as a result
of any exchange rate fluctuations.
Currency risk
The currency risk inherent in currency futures transactions is,
in the case of hedging transactions, the possibility that the
buyer/seller could buy/sell the foreign currency at a more favorable price during or at the end of maturity. In the case of uncovered transactions, there is possibility that the buyer/seller must
buy/sell the currency at a less favorable price. The potential loss
may substantially exceed the original contract value.
Financial standing risk
Financial standing risk in connection with currency futures
transactions derives from the possibility of counterparty default
due to insolvency, i.e. one party’s temporary or permanent inability to complete the currency futures transaction, making more
expensive covering transactions in the market necessary.
Liquidation of positions
Transfer risk
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
it will be possible at any time, however. It always depends very
strongly on the market situation; based on complicated market
conditions, you may have to perform trades at an unfavorable
market price, so that losses may incur.
The transfer of some foreign currencies may be restricted, in particular by the country issuing that currency. The orderly execution of the currency futures transaction would then be at risk.
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 arise, in particular:
–
Options that are not exercised in 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.
–
If you perform futures transactions in foreign currency,
an unfavorable trend in the foreign exchange market may
increase your risk of loss.
8. Currency futures transactions (currency
derivatives)
Definition
Currency future transaction is the firm undertaking to buy or to
sell a certain foreign currency amount at a specified date in the
future or over a specified period of time at a price agreed upon
conclusion of the contract. Provision or acceptance of foreign
currency equivalent is exercised with the same value date.
Effective as of 28 February 2013
9. Currency swaps (currency derivatives)
Definition
A transaction in which specified amounts of one currency are
exchanged for another currency over a certain period of time.
The interest rate differential between the two currencies is
reflected in a premium/discount to the re-exchange price.
Yield
The yield (profit/loss) for anyone trading in currency swaps results
from the positive/negative development of the interest rate differential and can be made in the case of a countertrade during
the maturity of the currency swap.
Financial standing risk
The financial standing risk in connection with currency swaps
derives from the possibility of counterparty default due to insolvency, i.e. one party’s temporary or permanent inability to
complete the currency swap, making more expensive covering
transactions in the market necessary.
Transfer risk
The transfer of some foreign currencies may be restricted, in particular by the country issuing that currency. The orderly execution of the currency futures transaction would then be at risk.
Page 07 of 13
Description of Investment Instruments and Warning of Risks
10. Interest Rate Swap (IRS) (interest rate
derivative)
Definition
Interest rate swap manages the exchange of variously defined
interest rate obligations to fixed nominal amount between two
contractual parties. In general, it is exchange of fixed payments
of interests for variable ones. This means that only interest payments are swapped, whereas no exchange of the capital flow
takes place.
Yield
The buyer of IRS (pays fixed interest rates) benefits from a rise
in interest rates. The seller of IRS (receives fixed interest rates)
benefits from a fall in interest rates.
The yield on an interest rate swap cannot be determined in
advance.
Interest rate risk
The interest rate risk results from the uncertainty over future
changes in market interest rates. The buyer/seller of interest
rate swap is exposed to loss if market interest rates fall/rise.
Financial standing risk
The financial standing risk encountered with IRS is derived
from the possibility of counterparty default, causing the loss
of positive cash values or making more expensive covering
transactions in the market necessary.
Special terms and conditions of interest rate swaps
IRS do not have standardized terms. The processing details must
be contractually agreed upon in advance. It is therefore imperative to obtain full information on exact terms and conditions
of interest rate swaps, in particular:
–
nominal amount,
–term,
–
interest rates definition.
11. Forward Rate Agreements (FRA) (interest rate
derivative)
Definition
Forward Rate Agreements are used to agree on interest rates
to be paid at the specified time in the future. Since FRAs are
dealt in on the interbank market and not on a stock exchange,
they do not have standardized terms. Unlike interest-rate futures, FRAs are customized investments instruments in terms
of nominal amount, currency and interest period.
Yield
Through buying/selling an FRA, the buyer/seller fixes the interest rate for the period in question. If the reference interest
rate is higher that the agreed interest rate (FRA price) at the
maturity date, the buyer of the FRA will be compensated for
the movement in interest rates. If the reference rate is lower
than the agreed interest rate (FRA price) at the maturity date,
the seller of the FRA will receive a compensation payment.
Effective as of 28 February 2013
Interest rate risk
The interest rate risk results from the uncertainty over future
changes in interest rates. Generally, this risk is all the higher,
the more pronounced the increase/decrease in interest rates is.
Financial standing risk
The financial standing risk with FRAs derives from the possibility of counterparty default, causing the loss of positive cash
values or making more expensive covering transactions at a lower price in the market necessary.
Special features of FRAs
FRAs do not have standardized terms, but are customized
investment instruments. It is therefore imperative to obtain full
information on the exact terms and condition, in particular:
–
nominal amount,
–term,
–
interest rates definition.
12. Over-the-counter (OTC) options (derivatives)
Standard options – Plain Vanilla Option
The buyer of an option has the right, on or before a specified
date, to buy (Call option) or sell (Put option) the underlying
asset (securities, currency, etc.) at a fixed (strike) price or (e.g.
in the case of interest-rate options) to receive a compensation
payment resulting from the positive difference between strike
price and market value at the time the option is exercised. The
option writer (seller) is obliged to fulfill the rights of the option
buyer. Options may differ according to the manner of exercise:
American type: during whole period of maturity
European type: at the end of maturity
Exotic options
Exotic options are financial derivatives derived from standard
options (Plain Vanilla Options).
Special form – Barrier options
In addition to the strike price, there is a threshold value (barrier).
When that barrier is reached, the option is either activated
(Knock-In Option) or deactivated (Knock-Out Option).
Special form - Digital (Payout) option
Option with a specified Payout, which the buyer of the option
receives in exchange for paying a premium, if the price (interest
rate) of the underlying asset is below or above (depending on the
option) the threshold value (barrier).
Yield
The buyer of an option will make a profit if the price of the
underlying asset rises above the strike price (in the case of
a Call option) or falls below the strike price (in the case of a Put
option). The option holder may either exercise the option or sell
it (Plain Vanilla Option, activate Knock-In Option, non-deactivated Knock-Out Option). If a Knock-In Option is not activated
or Knock-Out Option is deactivated, the option expires and
becomes worthless.
Page 08 of 13
Description of Investment Instruments and Warning of Risks
The holder of digital (Payout) options receives a yield if the
threshold value is reached before maturity or at maturity, which
means he/she receives the Payout.
General risks
The value (price) of an option depends on the strike, the performance and volatility of the underlying instrument, the option
life, the level of interest rates and the market situation. In the
worst case, therefore, the capital invested (option premium)
may become completely worthless. If the price of the underlying
asset moves contrary to the expectation of the option writer, the
potential loss will be virtually unlimited (Plain Vanilla Option,
barrier option) or in the amount of the agreed Payout (digital
option).
Please note, in particular, that options not exercised in a timely
manner will expire on the expiration date and will therefore
be erased from the accounts as worthless. Important: The bank
will not exercise your option without your express instructions.
Special risks of over-the-counter option transactions
The over-the-counter options do not have standardized terms,
but they are customized investments. It is therefore imperative
to obtain full information on the exact terms and conditions of
a option (style of exercise, expiry, etc.).
The financial standing risk encountered by the buyer of an overthe-counter option derives from the possibility of losing the
premium due to counterparty default, making more expensive
covering transactions in the market necessary.
Being customized products, over-the-counter options are
usually not traded on organized markets. Consequently, the
tradability of such options cannot be guaranteed at any time.
13. Currency option transactions (currency
derivatives)
Definition
The buyer of a currency option acquires the right, but not the
obligation, to buy or sell a fixed quantity of currency at a particular price on a specified date in the future or within a specified
period of time. The seller of the option grants this right. The
buyer pays the seller a premium. The following possibilities
exist:
–
The buyer of a Call option acquires the right to buy a fixed
amount in a specified currency at a particular price (exercise
price or strike price) on or before a particular date (expiry
date).
Yield
The buyer of a Call option will make a profit if the market price
of the currency rises above the agreed strike price, with the
option premium to be deducted from the gain. The buyer may
then buy the foreign currency at the strike price and re-sell it
immediately in the market.
The seller of a Call option receives a premium in exchange for
selling the option.
The same applies, in the opposite direction, to put options, which
are purchased in the expectation of rising currency rates.
Risks when purchasing options
Risk of forfeited premium
The buyer of an option incurs the risk of losing the entire
amount of the premium, which must be paid irrespective of
whether the option is exercised or not.
Financial standing risk
The financial standing risk in connection with the purchase
of currency options results from the possibility of counterparty
default. This will lead to the loss of the premium already paid
and make more expensive covering transactions in the market
necessary.
Currency risk
The currency risk is derived from the possibility of adverse moves
in the value of the respective currency during the life of the
option. In the worst case, the premium may be forfeited.
Risk when selling options
Currency risk
The risk at sale of options results from the possibility of adverse
moves in the value of the respective currency during the life
o the option. The resulting risk of loss is unlimited for the options being sold.
The premium of a currency option depends on the following
factors:
–
volatility of the underlying currency exchange rate (measure
of the expected fluctuation margin in the exchange rate),
–
the agreed strike price,
–
the amount of time remaining until expiration of the option,
–
the current exchange rate,
–
the interests rate level in both currencies,
–
The seller of a Call option guarantees to deliver/sell, at the
option holder’s request, a defined amount in a particular
currency at the agreed strike price on or before a particular
date.
–
The buyer of a Put option acquires the right to sell a fixed
amount in a specified currency at a particular price (exercise price or strike price) on or before a particular date.
The transfer of certain currencies may be restricted, in particular by the country issuing that currency. The orderly execution
of the trade would then be at risk.
–
The seller of a Put option guarantees to buy, at the option
holder’s request, a defined amount in a particular currency at the agreed strike price on or before a particular date.
Liquidity risk
Effective as of 28 February 2013
–liquidity.
Transfer risk
Being largely customized products, there are usually no organized secondary markets for that currency options. Consequently, it cannot be guaranteed that a currency option can
be sold at any time.
Page 09 of 13
Description of Investment Instruments and Warning of Risks
Special features of currency options
Currency options do not have standardized terms. It is therefore imperative to obtain full information on the exact terms
and conditions of the option, in particular:
Manner of exercise: Is the option exercisable at any time during
its life (American option) or only at its expiry (European option).
Expiry: When does the option right expire? Please note that your
bank will not exercise an option unless specifically instructed
to do so.
–
The seller of a Payers-Swaption undertakes to receive fixed
interest payments at the agreed strike price at the agreed
nominal amount and at the delivery date and make variable
interest payments in return.
–
The buyer of a Receivers-Swaption acquires the right to
receive fixed interest payments at the agreed strike price
at the agreed nominal amount and at the delivery date
and to make variable interest payments in return.
–
The seller of a Receivers-Swaption undertakes to make fixed
interest payments at the agreed strike price at the agreed
nominal amount and at delivery date and to receive variable interest payments in return.
14. Interest Rate Options (interest rate derivative)
Definition
Interest rate options are agreements on an upper or lower limit
to interest rates or an option for interest rate swaps. They are
used either
a) for hedging purposes or
Swaption with Cash Settlement
At the time of exercise of the Swaption, the purchaser receives
the difference between the values of the Swaps and Swaption
interest rate or current market interest rate.
b) for speculative trading to realize a gain.
Interest rate options are either Calls or Puts. Common variants
are Caps, Floors, Swaptions, etc.
Through buying a Cap, the buyer secures for himself/herself
an upper interest rate limit (=strike price) for future borrowings.
In speculative trading, the value of a Cap increases with rising
interest rates.
Selling a Cap can be used as a speculative instrument only. The
seller receives the premium and undertakes to compensate
the buyer for any difference in interest rates.
Floors secure the buyer a certain minimum interest rate on
a future investment. In speculative trading, the Floor value
increases with falling interest rates.
ad a) hedging purposes
Depending on the agreed reference periods, the current threemonth or six-month interest rate is compared with the agreed
Strike price. If the market price is higher than the Strike price,
the holder of the Cap will be compensated for the difference.
ad b) speculative trading to realize a gain
The value of a Cap increases as interest rates rise. In this case,
however, the forward rates (future interest rates traded today)
are more important than the current interest rates.
The same applies, in the opposite direction, to the purchase/
sale of a Floor. The buyer of a Floor secures for himself/herself
a lower limit to interest rates, while the seller holds a speculative
position.
Yield
The holder of an interest rate option will realize a yield if on
the exercise date the interest rate in the market is higher than
the price of the Strike Cap lower than the price of the Floor. In the
case of Swaptions, a yield can be achieved if on the exercise
date the interest rate in the market is above the agreed strike
price (with Payers-Swaption) or below the agreed strike price
(with Receivers-Swaptions). In any case, the premium must be
deduced from the return. The option premium received stays
with the seller, no matter whether the option is exercised or not.
Interest rate risk
The interest rate risk results from the possibility of future
interest rate changes. The buyer/seller of an interest-rate
option may incur a price loss if interest rates rise/fall. This risk
is all the higher, the more pronounced the increase/decrease
in interest rates is. This results in an unlimited potential of loss.
The premium of the interest-rate option depends on the following factors:
–
volatility of interest rates (interest difference),
–
agreed strike price,
–
the amount of time remaining until expiration,
–
level of interest rates in the market,
–
current financing costs,
A Swaption is an option on an Interest Rate Swap (IRS =
agreement to exchange interest payments). There are two
basic types of swaptions: Payers-Swaptions (right to pay fixed
interest rates) and Receivers-Swaptions (right to receive fixed
interest rates). Both variants can be either bought or sold.
–liquidity.
Furthermore, a distinction is made between two different types
of performance with different risk profiles:
Financial standing risk
Swaption with Swap Settlement
The purchaser becomes a party to the swap at the time of exercise of the swaption.
–
The buyer of a Payers-Swaption acquires the right to make
fixed interest payments at the strike price at the agreed
nominal amount and at the delivery date and to receive
variable interest payments in return.
Effective as of 28 February 2013
This means that the price of an option may remain unchanged
or decrease even though investor’s expectations as to the
movement of interest rates have been met.
The financial standing risk encountered by the buyer of an interest-rate option derives from the possibility of counterparty
default, causing the loss of positive cash values or making more
expensive covering transactions in the market necessary.
Risk of total loss at purchase
The maximal loss in the case of buying an interest-rate option
is the amount of the premium, which must be paid irrespective
of whether the option is exercised or not.
Page 10 of 13
Description of Investment Instruments and Warning of Risks
Special features of interest-rate options
Special terms and conditions for CCSs
Interest-rate options do not have standardized terms, but are
customized investment instruments. It is therefore imperative
to obtain full information on the exact terms and conditions,
in particular:
CCSs are not standardized. They are customized investment
instruments. It is therefore very important to get accurate information about them, especially with respect to:
Manner of exercise: Is the option exercisable at any time during
its life (American option) or only at expiry (European option)
–term,
Payment: Delivery of the underlying asset or cash settlement?
Expiry: When does the option right expire? Please note that your
bank will not exercise an option unless specifically instructed
to do so.
–
nominal amount,
–
definition of the interest rate,
–
definition of the currency,
–
definition of the exchange rate,
–
Initial Exchange (yes or no?).
15. Cross Currency Swap (CCS) (interest rate
derivative)
16. Commodity futures transactions (commodity
derivative)
Definition
Commodity futures transactions are special contracts that
involve rights or obligations to buy or sell certain commodities
at a predetermined price and time or during a specified period
of time. Commodity futures transactions are involved in the
instruments described below, among others.
A Cross Currency Swap is an exchange of differently defined
interest rate payables and different currencies on a fixed nominal value between two contractual partners. It is generally
an exchange of fixed interest payments in two different currencies. Both interest payments may also be in variable interest
rates payable. The flow of payments occurs in different currencies based on the same amount of capital, which is fixed on the
basis of the current exchange rate valid on the trade date.
Besides the exchange of interest rates payables or interest rates
receivables, there is an exchange of capital both at the beginning (Initial Exchange) and at the end of maturity (Final Exchange). Depending on the needs of the individual trading
partners, the Initial Exchange may be omitted.
Yield
The yield from a CCS cannot be determined in advance.
In the case of a positive trend in the exchange rate and in the
difference between the interest rates, a yield may be realized
from early liquidation of the CCSs. If the CCS is concluded with
an improvement of the difference in interest rates, a yield may
be realized from lower interest rates of another currency. That
yield may be neutralized in turn by exchange losses, however.
If the currency ratio develops in a positive manner, the yield
may further increase.
Interest rate risk
The interest rate risk results from uncertainty concerning the
future change in the market interest rate level. The buyer/seller
of a CCS is exposed to a risk of loss if the market interest level
falls/rises.
Currency risk
The currency risk results from uncertainty concerning the future
change in the relevant exchange relationship of the currencies
involved. In the case of a CCS with Final Exchange, it is especially important to note that currency risk exists not only in the
case of the default of a contracting partner but also during the
whole period of maturity.
Basic information about the individual instruments
Commodity Swaps
A Commodity Swap is an agreement involving the exchange
of a series of commodity price payments goods (“fixed amount”)
against variable commodity price payments (“market price”)
resulting exclusively in a cash settlement (“settlement amount”).
The buyer of a Commodity Swap acquires the right to be paid
a settlement amount if the market price rises above the fixed
amount. On the contrary, the buyer of a Commodity Swap is
obligated to pay the settlement amount if the market price falls
below the fixed amount.
The seller of Commodity Swap acquires the right to be paid
a settlement amount if the market price falls below the fixed
amount. On the contrary, the seller of a Commodity Swap is
obligated to pay the settlement amount if the market price
rises above the fixed amount.
Both payment flows (fixed/variable) are in the same currency
and based on the same nominal amount. Whereas the fixed
side of the swap is of the nature of a benchmark, the variable
side is related to the trading price of the relevant commodities
quoted on a stock exchange or otherwise published on the
commodities future market on the relevant fixing day or to a
commodity price index.
Commodity options with cash settlement
The buyer of a Commodity Put option pays a premium for the
right to receive the financial difference between the strike price
and the market price in relation to the nominal value if the
market price falls below the fixed amount.
The buyer of a Commodity Call option pays a premium for the
right to receive the financial difference between the strike price
and the market price if the market price rises above the fixed
amount.
Financial standing risk
The financial standing risk in the case of buying/selling a CCS
is the danger that the default of the transaction partner will
result in an obligation to provide additional cover.
Effective as of 28 February 2013
Page 11 of 13
Description of Investment Instruments and Warning of Risks
Risks – details on the various instruments
Risk of Commodity Swaps and Commodity Options with Cash
Settlement:
If the trend does not live up to your expectations, difference
coming out from exchange rate used at trade conclusion and
current market exchange rate at trade maturity must be paid.
This difference represents loss. Maximal height of loss cannot
be determined in advance. It can exceed potential provided
security.
Risk when buying Commodity Options – loss of value
A price change in the underlying asset (e.g. of a raw material)
that underlies the option as the subject matter of the contract
may reduce the value of the option. A loss of value may occur
in the case of a purchase option (Call) at exchange rate losses,
in case of sale option (Put) at exchange rate gains, of a subject
of contract, which is a base of the contract.
A loss in the value of the options may occur even if the price
of the underlying assets does not change because the value
of the option is also influenced by other price formation factors
(e.g. the term or frequency and intensity of the underlying asset).
Your risk when selling Commodity Options – leverage effect
The risk in the case of selling Commodity Options is that the
value of the underlying asset will not have moved in the direction
originally anticipated by the seller by the time that the option
expires. The resulting potential loss is unlimited for the options
being sold.
Risks of Commodity futures transactions
Price fluctuations
The amount of the payment obligation arising out of commodity futures transactions is determined by the prices on a certain
commodity futures market.
Commodity futures markets may depend on strong price fluctuations. Many factors related to supply and demand for commodities may influence the prices. It is not easy to forecast
or predict such pricing factors. Prices may be significantly influenced by unforeseen events, such as natural disasters, illnesses,
epidemics, or orders given by the public authorities, as well as
unpredictable developments, e.g. the effects of weather, variations in harvests, or risks connected with delivery, storage or
transport.
Currency risk
Commodity prices are often quoted in foreign currency. You will
also be exposed to currency market risk if you enter into a commodity transaction in which your obligation or right to counter-performance is denominated in foreign currency or a foreign
accounting unit or the value of the subject matter of the contract is determined thereby.
Liquidation / liquidity
Number of commodity futures markets is generally smaller than
financial futures markets and may therefore be less liquid. You
may be wholly or partially unable to liquidate a commodity futures position at the desired time because of insufficient market
liquidity. Moreover, the spread between the bid and ask prices
Effective as of 28 February 2013
in a contract may be relatively wide. It may be difficult or impossible to liquidate positions under certain market conditions.
Most commodity futures exchanges are authorized to set limits
on price fluctuations, for example. Such limits prohibit asks or
bids outside beyond certain limits during a certain period. This
may make it difficult or impossible to liquidate certain positions.
Limit- /Stop-Orders
Limit-Orders or Stop Loss-Order are instructions that limit
trading losses in the event of certain market movements. Although such possibilities of limiting risk are permitted on most
commodity futures exchanges, Limit-Orders or Stop Loss-Orders are not generally set for OTC commodities.
Futures and prompt transactions
It is especially important to understand the relationship between futures contract prices and prompt transactions. Although market forces may equalize the differences between
the futures contract price and the prompt transactions price
(Spot) of the commodities in question to such an extent that the
price difference on the delivery date is practically null, a variety
of market factors, including supply and demand, may still result
in differences between the contract price and prompt transaction price Spot) of the commodities in question.
Determination of the market price
Market prices are quoted either on the commodity futures exchanges or according to the usual market practices. Due to
system failures, system malfunctions on the exchanges or other
causes; it sometimes happens that no market price can be determined for the agreed fixing date. If no arrangement is made for
a substitute method of price determination, the calculation
agent is usually authorized to set the market price according
to his own reasonably exercised discretion.
17. Other information
Security (margin)
The Client must have provided a guarantee to the selected types
of the investment instruments (mentioned in the chapters 7, 8,
9, 10, 11, 12, 13, 14, 15, 16) in the amount of certain per cent from
the volume of the relevant transaction, which will be determined
by the “bank” before the business is agreed, according to the
total volume of business in CZK in dependence on the maturity
and rate of movement of the investment instrument price in CZK
or another currency, which will be determined by the bank,
in one of the following forms or their combinations.
Deposit of collateral blocked on an account, possibly of limit,
which the bank shall determine to the Client, or other values
accepted by the “bank“ (e.g. blocking of finances on a current
account for purposes of foreign payments, etc.)
Other financial liabilities
When trading with the investment instruments, the Client, as
a consequence of the transactions, may take over except the
costs for such investment instruments also other financial and
other liabilities including potential conditional obligations.
Page 12 of 13
Description of Investment Instruments and Warning of Risks
Leverage effect
Guarantee or obligation of a third party
In the case of futures transactions, the leverage effect may also
be used. The derivative transactions, in the case of collateral
deposit or guarantee provision, enable the Client to trade with
multiple higher volume of money than the collateral or limit
height. In the same way as the Client may multiply their profit through leverage effect, there also exists a risk that leverage
effect also multiplies losses, if the trade does not develop for the
Client’s benefit. In case of fluctuations by a percentage higher
than the collateral or limit, the Client may lose the whole investment.
In case that the bank offers an investment instrument including
is a guarantee of a third person or another obligation of a third
person to settle a claim of a creditor if not settled by the debtor
or if another condition specified in advance shall be fulfilled, the
Client shall receive information on this guarantee or another
obligation of a third person and data about the warrantor and
guarantee or about the undertaking of the third person and
obligation of the third person needed so that an unprofessional
Client or potentional unprofessional Client is able to adequately assess the guarantee or obligation of the third person.
Risk interaction
Information
Investment instruments may also arise as combination of investment instruments; this may lead then to increase of risk.
In case of such investment instrument supply, if the risks connected with investment instrument consisting of two or several
investment instruments or services could be higher than the
risks connected only with one of these investment instruments
or services, the Client shall be informed accordingly.
Since the investment instruments are subject to the market
and other changes, further information on description of the
investment instruments and risks connected with them shall
be continuously published on the bank’s internet page.
Selection of the trading venues designated for execution of the
Client’s instructions under fulfilling the best conditions is described in “Rules for Best Execution of Client Instructions”.
Public offer on an investment instrument
In case that at the time of providing information by the bank,
the investment instrument is a subject of a public offer and in the
connection with the public offer, the published booklet will be
in compliance with law, the bank fulfils its obligation to inform
by stating the fact, where the booklet is publicly available.
Effective as of 28 February 2013
Page 13 of 13