Better performance from price changes
Would you like to profit from price changes in an index, a stock or currencies? If so, you should consider "WAVEs" - warrant alternative vehicles. With WAVEs, investors can increase their profit from price changes. In January 2002, Deutsche Bank AG issued the first WAVEs in Germany. Nine months later more than 50% of dealing in leveraged products in Germany related to WAVEs. Not without reason: their pricing is transparent, they are easy to understand and they are cheaper than other leveraged derivatives. Disadvantages often linked to derivatives trading, such as margin payments, high volatility, unlimited risk and high transaction costs are not a feature of WAVEs.

Profit from Leverage
Investors can buy two types of WAVEs: - WAVE Calls, which they can purchase if they expect prices to rise, or WAVE Puts if they expect prices to fall. Whether the index, stock or currency rises or falls, investors can purchase WAVEs from Deutsche Bank AG and have the opportunity to profit from these price changes.

How WAVEs function?
WAVE characteristics can best be illustrated by looking at the instrument at expiry. Investors receive a cash amount equivalent to the positive difference between the current index level or stock price and the strike price, called the barrier level. Hence, the index level or stock price upon expiration must be higher than the strike price (WAVE Call) or lower than the strike price (WAVE Put).

Benefits of Leverage
Investors wishing to benefit from the fluctuations of an index or stock need not pay the full purchase price of the underlying. By investing in WAVEs, they pay only the difference between the current level/price and the WAVE's barrier level, plus a small premium. The WAVE's leverage effect is achieved by investing less capital. A further strong case for WAVEs: investors can participate in the fluctuations of the underlying on an almost 1-for-1 basis (in monetary terms). However, in percentage terms, a small price change in the underlying share/index leads to much higher profits for WAVE investors than for investors who have merely bought or sold the underlying directly. For example, let us consider a WAVE with an issue price of EUR 10 based on an underlying stock with a value of EUR 100. If the underlying stock rises by EUR 10 (to EUR 110), the WAVE will also rise by EUR 10 and have a new value of EUR 20 (subject to any adjustments due to the cover ratio - see below).

Tracking Price Movements
However, this opportunity for higher profits also carries a risk: participation in a WAVE ends if the level /price of the underlying equals the barrier level at any time during its life. It would also end if the price fell below the barrier level (WAVE Call) or rose above the barrier level (WAVE Put). In this case, the WAVE becomes worthless immediately ("knocks out") one's entire investment will be lost.

Points to note
WAVEs become worthless if the barrier level is reached at any time during trading hours or when the price of the underlying is lower (WAVE Calls) or higher (WAVE Puts) than the barrier level at any time (knock-out event). Price changes of the underlying security or index are amplified in the WAVEs (both positively and negatively) by the leverage effect. Investors should pay special attention to WAVEs on single stocks, as the danger of a knock-out is much higher than with WAVEs on indices. The main reason for this is the particular short-term price volatility of stocks, which can be caused by corporate news and large buy or sell orders. As Deutsche Bank AG is an active participant in international capital markets, price fluctuations caused by the market activities of Deutsche Bank AG itself cannot be excluded.

Important Notice
During the lifetime of the WAVE, Deutsche Bank may begin to liquidate its hedging position when the price or value of the underlying asset is approaching the barrier. This liquidation may increase the movement of the underlying price or value towards the barrier, and in the worst case could result in the knock-out of the WAVE, which would render it worthless.

Five tips on how to use WAVEs effectively

*       Never buy when the price of the underlying is close to the barrier!

*       Use stop loss limits

*       Watch market activities closely

*       Be aware of trading times of stock exchanges

*       Remember: the higher the leverage, the higher the risk

How can WAVEs become worthless?
WAVEs are suited to experienced investors only. WAVEs can become worthless if the barrier level is reached or if the price of the underlying share falls below (WAVE Calls) or rises above (WAVE Puts) the barrier level. An investor in WAVEs needs to appreciate that his or her WAVE may expire worthless. Time is money: The relevance of exchange trading times to share and index WAVEs. They can only become worthless during trading hours for the stock or index (as appropriate) on the relevant exchange. Outside these trading hours, the price development of the DAX® or a European stock during trading in New York or Tokyo cannot cause a knock-out event. On the other hand, though, a WAVE on the Dow JonesSM Index or the Nasdaq® Index can only be knocked out during trading hours in the US (between 15:30 and 22:00 CET). In the case of the Nikkei 225 Index, the knock-out can happen overnight if, in Tokyo, it falls below a certain level at any time from 01.00 to 08.00 CET. However, investors can avoid nasty overnight surprises. Indicators such as Nikkei futures usually point to possible price movements in advance.

Specific features of FX WAVEs
For the following should be noted in relation to FX WAVEs: exchange rates are traded 24 hours a day throughout the time zones in Asia, Europe and America. These WAVEs can therefore even be knocked out outside German exchange hours, even when an investor's local stock exchange is closed. The reference for the knock-out event is the Reuters page EUR=EBS - it shows the highs and lows of each FX rate pair of currencies traded between large banks in the various time zones.

Reduce knock-out risks with stop-loss orders
Whether dealing with a WAVE on stocks, indices or FX rates, we advise investors to use stop-loss orders to reduce the probability of a knock-out event. You will find further information about opportunities and risks associated with barrier warrants in our publication "Basic information about investing in securities" and "Basic information about forward transactions".

Daily Trading
You can trade with Deutsche Bank, the WAVEs market maker during the following times: off-exchange trading from 08.00 to 22.00 CET through all major discount brokers, banks and savings banks and on-exchange in (Stuttgart (EUWAX) and Frankfurt (Smart Trading) from 09.00 to 20.00 CET.

WAVEs on the Expiry Date
WAVEs can be traded on the securities exchanges until the end of the second day prior expiry. In off-exchange trading, however, Deutsche Bank AG will quote bid prices until 10.00 CET on the expiry date. WAVEs with an "intrinsic value" at expiry are exercised automatically. The relevant price for WAVEs on German indices and stocks is the closing price in the XETRA system on the expiry date. If the underlying for a WAVE is a non-German stock or index, details of the relevant closing price to be used for the final calculation (and how this is converted into EURO) can be found in the offering circular. The official reference for FX WAVE on FX rates is the rate on Reuters page SPOT at about 13.00 CET on the expiry date.

The influence of Volatility on WAVEs
In comparison to conventional warrants, the influence of volatility on WAVE prices is small. In contrast to normal warrants, the prices of WAVEs rise when volatility decreases. In this case, the knock-out event becomes less probable. However, that said, when the price of a WAVE approaches the knock-out barrier, it will lose value in rising volatility as this increases the likelihood that the WAVE will be knocked out. However, this influence only becomes relevant for investors if the price of the underlying is close to the knock-out barrier. Due to this very high risk, investors should consider whether it is better to buy a more conservative WAVE to avoid their WAVE becoming worthless.

It's your choice: Various ways of using WAVEs
WAVEs are very versatile. They are suitable as an alternative to conventional warrants, but they are also interesting as a substitute for futures in speculative activities. The easiest way to use WAVEs is so-called "leveraged index tracking". Here the investor tries to "leverage" the movements of an Index. If, for example, the DAX® rises by 5% and the WAVE Call has a leverage of 2, the price of the WAVE rises by 10%. However, you should also monitor prices very closely when index tracking. This is because downward movements in the DAX® are leveraged. Regardless of whether the investor is speculating on rising (WAVE Calls) or falling (WAVE Puts) index levels, he or she should choose WAVEs with a maximum leverage of 3.

Ever popular: Day-Trading
WAVEs can also be used for day-trading, which is growing in popularity among experienced investors. Day traders speculate on very short-term trends in the underlying index or security. They choose WAVEs with barrier levels close to the current index level or stock price. The reason for this is obvious but also carries a considerable risk. Such WAVEs have a leverage of more than 10, sometimes even 20 or more. Hence, index rises are reflected on a leveraged basis - but so are index falls. If there is a movement of 1% in the DAX®, the price of a WAVE Call with a leverage of 20 will rise or fall, as the case may be, by a full 20%. Therefore, this strategy - like day-trading in general - could only be recommended for very experienced investors who watch market activities closely and on a daily basis.

The Elegant Alternative: Hedging portfolios with WAVEs
WAVEs can also be used to hedge a portfolio. Because of the knock-out barrier feature, WAVE Puts are cheaper than comparable conventional put warrants, hence hedging a DAX®-like portfolio becomes cheaper for the investor. Additionally WAVE Puts offer the advantage of replicating index movements on a 1:1 basis, so it is easy to calculate the number of WAVEs necessary to hedge the portfolio. If the WAVE Put expires worthless anyway, the investor can smile all the same as his or her portfolio will inevitably have risen at that time.

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