Leverage without Maturity
Ordinary returns achieved by investing in shares or indices are often not high enough to satisfy the demands of the more active players on the stock exchanges, with many investors wishing to benefit to a greater extent from the movements in equities or indices. This effect is what the experts call leverage. An example of leverage is the scenario where if, for example, the share price moves by five percent, the investment moves by ten percent, i.e., twice as much. This is known as leverage by a factor of 2.
In the past, investors used leveraged products for this purpose - however, these products were only available with a limited lifespan. The longer the time to maturity, the more expensive it is to buy the product. The investors of today who are prepared to take risks no longer have to accept this limitation. In WAVEs XXL, Deutsche Bank AG is now offering for the first time a product that gives a leverage effect without premium or maturity. Furthermore, volatilities associated with the options universe have no impact. - Leverage without maturity - the innovative approach to risk-tolerant investing.
No Premium, No Maturity, No Volatility
You have the choice between Calls and Puts. WAVE XXL Calls enable you to benefit from rising prices in the underlying, such as an index. WAVE XXL Puts enable you to benefit from falling prices. Whether the underlying rises or falls, WAVEs XXL will replicate this movement 1:1, adjusted of course by the cover ratio and possibly the exchange rate. WAVEs XXL are often referred to as "perpetual futures" due to the combination of this tracking dynamic and an indefinite lifespan. Yet their real advantages over conventional futures are also here in their indefinite lifespan and in their easy tradability. Their built-in stop-loss function offers an additional advantage over futures. Should the market run contrary to your expectations, the built-in stop-loss function of WAVEs XXL will usually protect investors from losing the entire capital invested. As opposed to futures, they are protected from any losses over and above the initial capital invested.
Dynamic and successful: small investment, high leverage
Assuming that you believe that German equity prices will rise and that you therefore wish to invest in the DAX®, you would have to pay EUR 3,000 for an index certificate if the index level stood at 3,000 points. In the same way, the WAVEs XXL offered by Deutsche Bank reflect the movements of the DAX® on a 1:1 basis, but do not cost as much. This creates a leverage effect. The following example will illustrate this effect: A WAVE XXL Call with a cover ratio of 0.01 has a strike price and a so-called initial funding level of 2,600 DAX® points. In addition, it features a stop-loss level of about 6% (barrier level adjustment rate) above the strike price, i.e., initially, 2,760 points. The difference between the current DAX® level and the strike price of the WAVE XXL Call is 400 points, resulting in an initial price for the WAVE XXL of EUR 4.00.
Leverage without Premium
With the WAVE XXL Call, Deutsche Bank AG offers you the advantage of tracking the movements of the DAX® on a 1:1 basis without needing to be fully invested in it - a clear funding advantage. However, for every day on which you use the WAVE XXL Call, funding costs, in the form of interest, will be generated. For WAVE XXL Calls, these costs are charged by increasing the strike price on a daily basis. In our example, the funding costs are 5% p.a., resulting in a daily charge of approx. 0.36 index points (5% x 2,600/365) or, in other words, 0.36 cents per WAVE XXL Call. After one day, the new strike price would therefore amount to 2,600.36 points. At an unchanged DAX® level of 3,000 points, the WAVE XXL Call will have a value of 399.64 points (3,000 - 2,600.36) or EUR 3.9964.
Reasons that speak for themselves
Let us take a look at the same example one month later: The funding costs have amounted to 10.68 cents over 30 days and, at the beginning of the trading day, the strike price stands at 2,610.68 points. The current strike price automatically becomes the new funding level after the close of trading on this day of the month, also called adjustment day. Thus, the 2,610.68 index points will be set as the new funding level for the following month. In addition, the stop-loss level is again fixed at approximately 6% above the current strike price (2,770 points in our example). Further assumption: 20 days after the first adjustment of the funding level and stop-loss level, the DAX® moves up by 300 points (10 percent) to 3,300 points. This rise will also be reflected in the WAVE XXL Call. The WAVE XXL Call now has a value of EUR 6.82 (3,300 - 2,617.83, adjusted by the cover ratio). This represents a performance of 70.5 percent, compared to a 10 percent increase in the DAX® - this is how you benefit from the leverage effect. Naturally, downward movements in the index will likewise be replicated with leveraged effect by the WAVE XXL Call, resulting in losses. However, if the DAX® falls to the new stop-loss level of 2,770 points or lower, the stop-loss function will be triggered, and investors will receive a differential amount (as described under in the glossary below under "The differential amount for stop-loss").
How WAVE XXL Puts work?
If you wish to speculate on the falling prices of the underlying, there are WAVE XXL Puts. Funding costs must also be taken into consideration for WAVE XXL Puts. As Deutsche Bank AG gains a funding advantage from the associated hedge, the resulting benefits will be passed on to the investors. Thus, in contrast to WAVE XXL Calls, the funding costs are credited to you on a daily basis by adding them to the strike price. After one month, for example, funding costs have therefore accumulated over 30 days and the strike price will have increased because of these costs. Following the close of trading on the adjustment day, the strike price automatically becomes the new funding level, which will be fixed for the next month. In addition, the stop-loss level is again fixed at approximately 6% below the then current strike price. The leverage effect operates in the same manner as with WAVE XXL Calls, i.e., disproportionately to the negative movement of the underlying. Of course, if the price of the underlying increases, the WAVE XXL Put will lose its value accordingly. As long as the index remains below the stop-loss level of the WAVE XXL Put, the price of the WAVE XXL Put will be the difference between the strike price and the current index level. If the index reaches or exceeds the stop-loss level, the investor will be paid the differential amount (as described under Stop-loss in the glossary below).
WAVEs XXL: The Benefits at a glance
* High leverage effect: a lower capital investment than a direct investment in the underlying op-loss level (payment of differential amount)
* No premium
* No maturity
* No volatility impact
* No margin calls or roll-over risks as with futures contracts
* No interest costs for day trading Tradable on every exchange trading day, with Deutsche Bank AG as a market maker: 08.00 to 22.00 CET on an over-the-counter basis with all major discount brokers; 09.00 to 20.00 CET on the Stuttgart (EUWAX) and Frankfurt (Smart Trading) Stock Exchanges.
Things to Keep in Mind
WAVEs XXL expire immediately if the stop-loss level is reached during trading, i.e., when the strike price falls below the stop-loss level of a WAVE XXL Call or exceeds the stop-loss level of a WAVE XXL Put (a stop-loss event). In such cases, you will be paid the differential amount (the difference between the strike price and the stop-loss exercise price), which, in the worst case scenario, may be equal to zero. This will be affected by Deutsche Bank's hedging position, which depending on the liquidity of the underlying and the size of the position, Deutsche Bank AG has up to three hours to complete. The price at which Deutsche Bank AG closes the position is "the stop-loss exercise price". The leverage effect magnifies, both positively and negatively, any price movements in the underlying. As Deutsche Bank AG also engages in transactions in the international capital markets, any impact on the price development by Deutsche Bank AG itself cannot be ruled out. For more information on the risks and rewards of barrier warrants, please consult: "Basisinformationen über Vermögensanlagen in Wertpapieren" and "Basisinformationen über Termingeschäfte".