Open End Knock-Out Warrants at a glance | BNP Paribas Markets

Open End Knock‑Out Warrants offer investors, similar to Mini‑Future Certificates, leverage without a fixed expiry date. They let investors amplify the percentage movement of an underlying asset by a multiple and,
if the price movement is correctly anticipated, generate a high return.
At the same time, the risk of losing the invested capital also increases if the underlying price moves in the opposite direction.

Because of the leverage, the prices of Open End Knock‑Out Warrants can move rapidly. Therefore, they should be monitored daily, even though they can be held for a longer period in principle.

Open End Knock‑Out Warrants are aimed at investors looking for instruments to diversify their portfolios. These products should not constitute the entirety of a portfolio.

Advantages at a glance

Leverage effect due to modest capital outlay
Theoretically unlimited investment term
Simple and transparent pricing
Risk limitation thanks to an embedded Stop‑Loss Level/Knock‑Out Barrier
No volatility effects like those found with warrants
No margin requirements and no rollover risks that come with futures trading
Suitable for hedging existing positions

Disadvantages at a glance

Early termination if the Stop-Loss Level/Knock-Out Barrier is reached
(Stop-Loss Event/Knock-Out Event)
Total loss of the invested capital if the underlying moves in the wrong direction
and the Stop‑Loss Level/Knock‑Out Barrier is hit
Currency risk when the Open‑End Knock‑Out Warrant is quoted in a different currency
than the underlying asset
Investors are exposed to the credit risk of the issuer and of the guarantor

The concept

With Open End Knock‑Out Warrants, investors can take leveraged positions on both rising and falling prices of an underlying asset. In simple terms, BNP Paribas finances part of the cost of the underlying asset, reducing the investor’s required capital outlay. Since the investor fully participates in the performance of the underlying asset, this creates a leverage effect. The financing costs associated with this leveraged exposure are adjusted daily against the investor’s invested capital.

An additional advantage of Open End Knock-Out Warrants is that they are issued without a fixed maturity date, giving them a theoretically unlimited term. However, the issuer reserves the right to terminate an Open End Knock-Out Warrant early by notifying investors at least ten days prior to the intended termination date.

If an investor expects an underlying asset’s price to rise, they can purchase a corresponding Open End Knock-Out Warrant Call. Conversely, an Open End Knock-Out Warrant Put is suitable for investors anticipating a decline in the underlying asset’s price.

The leverage effect

With direct investments – such as in a stock or commodity – the investor pays the full price of the asset and fully participates in its price movements. In contrast, with an Open End Knock-Out Warrant, the investor only pays a fraction of the underlying asset’s value; the remaining portion, called the Financing Level, is covered by BNP Paribas.

Since BNP Paribas allows the investor to fully participate in the price performance (subject to financing costs charged to the investor), this creates leverage – both in favorable and unfavorable directions. The leverage effect is greater the smaller the investor’s proportional contribution to the underlying asset, indicating the degree to which the Open End Knock-Out Warrant magnifies the asset’s price movements. For example, if the underlying asset rises by 3%, an Open End Knock-Out Warrant Call with a leverage of five would increase in value by 15%.
An Open End Knock-Out Warrant with a leverage of ten moves roughly ten times more than the underlying asset. This is because the Open End Knock-Out Warrant’s price typically represents only 10% of the underlying asset’s value, while BNP Paribas finances the remaining 90%.
The leverage effect amplifies price movements – both upward and downward – which can benefit or harm the investor. The higher the leverage, the more sensitive the Open End Knock-Out Warrant is to price fluctuations in the underlying asset. However, the maximum loss is always limited to the initial purchase price of the Open End Knock-Out Warrant.

The value of an Open End Knock-Out Warrant, i.e. the capital outlay required from investors, is equal to the difference between the price of the underlying asset and the Financing Level, with Conversion Rate and Ratio factored in where appropriate:

Value of Open End Knock-Out Warrant Call
= (Price of underlying – Financing Level) / Ratio x Conversion Rate

Value of Open End Knock-Out Warrant Put
= (Financing Level – Price of underlying) / Ratio x Conversion Rate

The leverage of a Open End Knock-Out Warrant is thus calculated as follows:

Leverage of Open End Knock-Out Warrant Call
= Price of underlying / (Value of Open End Knock-Out Warrant Call x Ratio) x Conversion Rate

Leverage of Open End Knock-Out Warrant Put
= Price of underlying / (Value of Open End Knock-Out Warrant Put x Ratio) x Conversion Rate

The Financing Level

The amount provided by BNP Paribas is referred to as the Financing Level. For an Open End Knock-Out Warrant Call, the Financing Level is set below the price of the underlying asset, while for an Open End Knock-Out Warrant Put, it is set above the price of the underlying asset.

As with all leveraged products, investors must bear the financing costs. With Open End Knock-Out Warrants, this is done through a daily adjustment of the Financing Level. This means that the Financing Level does not remain constant over the life of the Open End Knock-Out Warrant but is adjusted on a daily basis. Investors are therefore advised to actively manage their positions to balance the actual costs against the expected returns of their strategy.

The adjustment of the Financing Level is determined by the following factors:

The Market Rate in the currency of the underlying
An Interest Rate Margin (Financing Spread) set by BNP Paribas
Any dividends paid out on the underlying (Dividend Adjustment Amount)
Rollover of the underlying futures contract (for Open End Knock-Out Warrants on commodity futures)

Please note: BNP Paribas may also apply financing costs during the trading day, meaning that day traders (who buy and sell their positions within a single trading day) may also incur financing costs.

Additional fees

Mark-up fee: The ask price of an Open End Knock-Out Warrant is higher than its intrinsic value. The difference (”mark-up“) comprises a margin for the issuer and a protection against gap risks. The mark-up fee can be lowered or increased during the lifetime of the product, depending on the prevailing market conditions.

Bid/ask spread: The bid/ask spread changes depending on the products, and can be expanded depending on the prevailing market conditions.

The Stop-Loss Level/Knock-Out Barrier

Open End Knock-Out Warrants incorporate a mechanism that prevents their value from falling below zero, thereby eliminating any obligation for investors to cover additional losses. This is achieved through a Stop-Loss Level/Knock-Out Barrier. If this level is reached or fallen below (for Open End Knock-Out Warrant Calls) or exceeded (for Open End Knock-Out Warrant Puts), the Open End Knock-Out Warrant immediately expires. The Stop-Loss Level/Knock-Out Barrier corresponds to the Financing Level and is adjusted daily.

In this regard, Open End Knock-Out Warrants differ from Mini-Future Certificates, where the Stop-Loss Level is set relative to the Financing Level according to a Stop-Loss Buffer (a pre-defined distance between the Financing Level and Stop-Loss Level established by BNP Paribas) and adjusted only on the first trading day of each month. Due to the absence of this Stop-Loss Buffer, Open End Knock-Out Warrants can be issued with higher leverage than is possible with Mini-Future Certificates.

No residual value

Unlike Mini-Future Certificates, Open End Knock-Out Warrants do not pay out any residual value due to the absence of a Stop-Loss Buffer. When the Stop-Loss Level/Knock-Out Barrier is reached or fallen below (for Open End Knock-Out Warrants Calls) or exceeded (for Open End Knock-Out Warrants Puts), the Open End Knock-Out Warrant expires worthless.

Different products for different risk profiles

To cater to varying investor requirements, Open End Knock-Out Warrants are available with different Financing Levels or Stop-Loss Levels/Knock-Out Barriers, much like how warrants are offered with different strike prices.

Potential investment strategies

Open End Knock-Out Warrants are available on various underlying assets and offer diverse application possibilities. The two primary use cases are explained below.

Speculation
Open End Knock-Out Warrants may be suitable for investors who have a specific view on the future price movement of an underlying asset and wish to amplify their profits from the anticipated trend. They enable investors to leverage their exposure across various global asset classes, adding dynamic potential to a diversified portfolio.

Hedging
Leveraged products can be suitable for hedging existing portfolio positions. For example, Open End Knock-Out Warrant Puts on the SMI^® or individual stocks can be used to hedge equity positions. Currency risks can also be hedged using leveraged products.

You can find a hedging example in our article on "Portfolio hedging". If you have any questions, please do not hesitate to contact us during our business hours on 058 212 68 50.