Constant-Leverage Equity Exposure: Product Structures and Tradeoffs

# How is this financial product called?


# How is this financial product called?












I have only basic limited knowledge about financial derivatives and I did not find exactly what I was searching for. I found open end turbo call, knock outs, but I am searching for this:

Underlying should be a regular "famous" stock e.g. in German DAX, let's consider BMW.

Based on this underlying I am searching for a derivative which does the following:

- In a long position I want to have a leverage factor of about 5 to 20. So if the stock increases by one unit (percent) the the value of my position should increase by factor 5 resp. factor 20 (percent). If it decreases of course I loose by this factor.

- Second I want to have a constant factor. This factor should not change and stay stable over the complete investment time.

- Third I want to have it open end. So I want to hold it for quite a long time and stay flexible to be able to sell whenever I want, lets say quite long means 2-5 years.

- It should have no knock-out.

- Ideally there shouldn't be any payments in between. So I buy and I sell, but no dividend or so. But this is not so important.

How is this called? Can you give me a tradeable example for BMW?

## Answer by pyCthon (score 5, accepted)

https://quant.stackexchange.com/a/24460

Here is an example of such a product in Europe. (I don't personally own or recommend them., there are also other such issuers.)

Commerzbank Faktor certificates: These should meet all your requirements, range of -10x to +10x constant leverage, open ended, no dividends, no knock-out's as well.

http://www.certificats.commerzbank.ch/SiteContent/11/5/2/725/41/Faktor_QuickGuide_A4_Eng.pdf

Index Example:

http://zertifikate.finanztreff.de/dvt_einzelkurs_uebersicht.htn?seite=zertifikate&i=35002894

Single Name Example's:

BMW: http://zertifikate.commerzbank.de/Products/ProductDetailsDownloadPIB.aspx?type=pib&isin=DE000CZ6RQ37

DB: http://zertifikat.finanzen.net/optionsscheine/Auf-Deutsche-Bank-AG/CZ0VVR

## Answer by Nicholas (score 3)

https://quant.stackexchange.com/a/23245

structure a bespoke total return swap where you explicitly specify the reference index, it's calculation (i.e. stock price * factor etc..), payoffs, margins etc... an example of such swap could be contract for difference (CFD).

## Answer by Todd Page (score 3)

https://quant.stackexchange.com/a/24360

It could be done as a kind of Structured Product. I don't know of a specific name for this type of instrument.

From what you describe, it doesn't actually involve any optionality, just leveraged exposure to an underlying. You also mention participating in downside risk, so it's not an option.

But you do mention a 'constant factor', which you need to explain a bit more, but sounds like some kind of 'coupon'. Depending on what you mean by this, you could come up with a Structured Product that is basically a Total Return Equity Swap, plus some extra (possibly contingent) payout component.

The payoff "index" of the swap component would be defined as 5x of your underlying.

While relatively simple to price and mark to market, any reasonable dealer would probably charge a large fee to take on this risk. (Since they would have to go out and hedge this extremely leveraged position, probably using options and/or futures)

## Answer by amsh (score 2)

https://quant.stackexchange.com/a/24357

You may want to consider Single Stock Futures in Eurex.

BMW: http://www.eurexchange.com/exchange-en/products/equ/fut/BMW/25544

## Answer by Freddorick (score 2)

https://quant.stackexchange.com/a/24359

There is no product which truly matches your requirement.

As mentioned in other answers and comments you can structure the product by using a future or a swap. However, in both cases you have an indirect knock-out which is when you receive a margin call requiring you to provide additional funds. You will always have this problem as you essentially borrow money. In addition, a future will have to be rolled into the next contract.

If you choose to buy options, as suggested by some, you do not have a constant leverage. Moreover, your exposure is not symmetric and you will loose the time value of the option over time which makes this type of investment expensive.

I think you get closest to your desired product by taking out a bank loan and buying 5 or 20 shares instead of 1. If you prefer to not receive dividends you can buy zero-calls instead. However, I do not recommend to use this strategy. Also keep in mind that you will need to pay interest on the bank loan during the investment period.

If you are a retail investor, you are likely best off with an ETF. If you must, you can also buy a leveraged ETF. Leveraged ETFs do not require a margin, have no knock-out do not have a fixed maturity. However, ETFs are usually not available for single stocks.

## Answer by arodrisa (score 1)

https://quant.stackexchange.com/a/24358

Is much simpler, what he really want's is an exotic option. Therefore OTC. So it's name may depend on the counterparty and the condition he imposes. But regarding my comment, he needs to have clear what he wants to buy and sell. As all the conditions can be considered in the model, as long as they are determined with his counterparty.

## Answer by HyperVol (score 1)

https://quant.stackexchange.com/a/24370

I would suggest you two ways to have such exposure :-

- LEAPS ( Long term equity anticipation securities ) are basically long-dated options for terms like 2-3 years. They're pretty much available in form of calls and puts on common equity ticks. Options in general , as you know , provide huge leverage. Hence this satisfies all your conditions. An additional bonus feature is downside risk protection

- Find a broker who provides you such leverage on your investments. AFAIK , you'd have to maintain a very high margin for such condition to be in place.

Personally , I'd suggest that Option 1 would be the good way to go !