Go for warrants and certificates!

Please note that warrants and certificates can fluctuate in value. The value of your warrants and certificates can go down as well as up.

A warrant is a financial product which conveys to its holder the right, but not the obligation, to buy (in the case of a call warrant) or sell (in the case of a put warrant) shares of the underlying security at a specified price (the strike price) on or before a given date (expiration day). After this given date, the right ceases to exist. To obtain this right, the holder pays a premium that is far lower than the underlying's price, which can be a share, an index, etc.

 What are certificates?

A certificate is an exchange traded security for which the remuneration calculation method is predetermined upon issue. A variety of investment profiles exist depending on the certificate type.
Several different types of certificates exist : digital certificates, knock out certificates, reverse convertibles, discount certificates, capital protected certificates, Call/Put spread certificates (plain or hybrid), bonus certificates, pure indexation certificates and other Structured products.

Warrants and certificates are user friendly and have many advantages:

• access to the world
  warrants and certificates allow you to invest in a range of assets from around the world. ;
• diversity
  warrants and certificates have a broad range of underlying values, such as shares, indices, baskets, etc., with different maturity dates and exercise prices;
• simplicity
  warrants and certificates are simple to buy via your bank or broker ;
• liquidity
  warrants and certificates provide guaranteed liquidity as issuers continuously provide bid and ask prices;
• transparency
  large amounts of information on warrants and certificates can be obtained from Euronext's website, issuers' sites and the financial press;
• security
  warrants and certificates are scrutinised by national regulators before being admitted to trading on Euronext's regulated market.

• Small investment, potentially high profit (leverage)
  Warrants and certificates can provide leverage. This means a warrant or a certificate buyer can pay a relatively small premium for market exposure in relation to the contract value. To buy a warrant or a certificate, investors only have to pay the premium - that is to say the price of the warrant or the certificate-, which is a small percentage of the price of the underlying. As a result, the potential profit on warrants and certificates can be far greater in percentage terms than the potential profit on the underlying. This difference is known as the warrant's or the certificate’s leverage. Leverage indicates the extent to which a warrant or a certificate enhances returns on the underlying, and is calculated by dividing the underlying's price by the warrant's or the certificate’s premium (after being adjusted for parity).
• Maximum loss fixed in advance
  The maximum loss that can be incurred on a warrant or a certificate is never more than the amount originally invested. In a worst case scenario, the holder of a warrant or a certificate can lose the entire premium (100% of the investment), which is a small amount compared to the losses that could have been made on the underlying.
• Easy and cheap way to invest in worldwide assets or on investement strategies generally harder to access for the private investor
  Warrants and certificates allow you to invest in the world's largest multinationals, leading indices, currencies, thematic baskets and even oil. It is much more difficult and expensive to obtain direct access to these investments than it is to submit a simple order to buy a warrant or a certificate based on them. You can buy warrants and certificates on these assets on Euronext via your broker. Warrants and certificates are traded in euros, even those based on Japanese or US shares, for example. However, you do run currency risks with such warrants and certificates.
• Diversifying your portfolio
  Warrants and certificates are a cheap and easy way of diversifying your investments, increasing or reducing the overall risk attached to your total investment. You can use warrants and certificates that bear little resemblance to the composition of your portfolio to add risk, thus hoping to improve the overall performance of your portfolio. The risk attached to this strategy is limited if the portfolio is secure and stable in the first place. You can also use put warrants that closely resemble the composition of your portfolio to protect your entire investment portfolio against price falls.
• Time element
  Since a warrant's expiry date may be several years away, warrants allow you to wait for the optimum moment to buy or sell the underlying. You can benefit from rises in share prices now, instead of having to wait until you have the necessary capital at your disposal. You can wait to see how a share performs before buying it. If your anticipation is not realised, your loss is limited to the premium you paid for the warrant. If the performance of a particular share is disapointing you can postpone the moment when you sell your shares, and you can use put warrants to protect you against the risk of a sharp drop in the price of your shares if you plan to sell them in the future to finance an expensive purchase.

There are three main risks attached to warrants and certificates:

• Time always works against warrant holder
  This means that if the underlying does not perform in the way you predict before the expiry date, your warrant will be worthless. This risk affects the warrant's premium. As the expiry date approaches, it becomes less likely that the underlying will fluctuate sharply before it expires, which reduces the warrant's value. Time works against investors in warrants. Moreover, if the underlying stays at the same price for a long period of time, the warrant's premium will gradually decline. As soon as the market anticipation is wrong, the warrant position should be cut and another one more adapt to the market condition should be bought. As far as certificates are concerned, depending on the different product types, time decay may have very little effect and sometimes the passing of time can actually positively influence the price of the certificate.
• Leverage can work against investors
  With warrants and certificates, price movements in all directions are magnified, and so a small adverse movement in the underlying can have a major impact on the value of the products. Leverage explains why warrant and certificate premiums frequently rise or fall by more than 50% a day.
• Volatility can also work against investors
  Volatility is the tendency of the underlying security's market price to fluctuate either up or down. It reflects a price change's magnitude; it does not imply a bias towards price movement in one direction or the other. Thus, it is a major factor in determining a warrant's premium. The higher the volatility of the underlying, the higher the premium because there is a greater possibility that the warrant will become profitable. Generally, as the price of an underlying increases, the volatility decreases and as a result the effect on the premiums of calls warrants are uncertain: what is earned on the underlying price can be lost on volatility. That is the main reason why the premium of a warrant does not always increase when the underlying price increases. But as far as certificates are concerned they are generally only very slightly sensitive to volatility movements.

At the end of 2008, 13,000 different warrants and certificates are listed on NYSE Euronext. The underlying is the asset or index against whose price fluctuations the warrants and certificates premium vary. The underlying of a warrant is the investment product that can be bought or sold at the strike price. It may be a share, a basket of shares, an index, an interest rate, a currency or a commodity.

You can buy and sell warrants and certificates via your traditional intermediary in the same way as you do with shares or trackers. They will put your buy order through to Euronext electronic order book.

Nonetheless before investing, it is a good idea to:

• read the issuing note,
• verify the characteristics of the warrant on www.euronext.com,
• keep an eye on the market and on the underlying which can benefit from modification (capital events on stocks for example).

Euronext lists thousands of warrants and certificates, and it is important to select the right warrant on the underlying you have chosen. Warrants and certificates not only have different prices, their potential price development is also different as they all have different expiry dates, investment profiles, characteristics and strike prices.
You should never select a warrant or a certificate purely on the basis of its absolute price. Although the absolute price of a warrant or certificate may be low, its relative price may be very high. You should therefore take into account the intrinsic value in the warrant or certificate premium.
Two other useful indicators for selecting warrants and certificates are the delta and elasticity. These are values that reflect the situation at a particular moment in time and therefore allow you to compare warrants and certificates objectively. These values can be calculated for all warrants and certificates, and information about them can be found on the websites of most issuers.

Trading
Warrants and certificates are traded on Euronext's cash market in the same way as shares. They can be bought and sold throughout the day from 9.05 a.m. to 5.25 p.m. Warrants and certificates can be traded through your bank or broker, which will send your buy or sell order to the exchange. It is advisable to state a limit price for your order, so that you do not have to pay more or receive less than you intended.
Transaction fees differ depending on the intermediary involved. Your bank or broker will tell you which fees apply to you.
There is often a minimum trade size for warrants and certificates. If this is 1,000, it means you can buy and sell the warrants and certificates in batches of 1,000.

Price fluctuations and trading freezes
Euronext has specific trading rules for warrants and certificates, which are intended to protect investors from sharp price movements. Trading in a warrant is frozen when a new order is entered in the order book and its execution results in a price movement that exceeds the relevant threshold. The thresholds are maximum acceptable price movements and are stated in percentages.
Following a trading freeze, Euronext uses an automatic procedure to resume trading in the warrant or the certificate

Liquidity provider system
To ensure that investors are always able to buy and sell warrants and certificates at good prices, Euronext has concluded liquidity agreements with the major issuers of warrants and certificates. Under these agreements, liquidity providers have to place orders that comply with strict criteria regarding maximum spreads and minimum quantities throughout the trading day.
Under some circumstances, such as system breakdowns or unusual market conditions, Euronext can release liquidity providers from their obligations. At such times it may be difficult to trade in the affected warrants and certificates.

Last day of trading
The last day of trading in a warrant is not always the warrant's expiry date. In Brussels and Paris the last day of trading in warrants and certificates may be six days before the expiry date, while warrants and certificates listed in Amsterdam and Portugal may be four days before the expiry date. We recommend that you carefully check the contract specifications of your warrants and certificates.

Similarities
Warrants and options are derived from shares, bonds, indices or other investment products. Like warrants, options also have a lifetime, an expiration date and an exercise price, and their prices depend on the same factors and develop in the same way as warrant prices.

Differences

• Options are contracts, warrants are financial products
  Options are contracts created and concluded on the options market. When you buy an option, you are buying a contract that entitles you to buy the underlying value. If you want to trade in options, you must conclude a special agreement with your stockbroker.
  Warrants are traded on the stock market, and you do not have to conclude an agreement to trade them. They are not created by the exchange like options, but by banks aiming to meet the demands of the market.
• Standardised and non-standardised contracts
  Option contracts are standardised, which means that nearly all options that are issued have to comply with specific rules regarding their lifetime, contract size, exercise price and trading unit.
  Warrants do not have to comply with any standards for their maturity, strike price or parity. Banks can issue warrants with any specifications they like when there is sufficient demand. This means there are many different types of warrants in circulation, with a wide variety of times to maturity, exercise prices, contract sizes and parities.
• Underlying values
  Warrants are issued on many different types of underlying values, whereas the options market focuses on domestic shares, indices and bonds.
• Options are always available
  An unlimited number of contracts can be created in every option series, and the number of options in circulation does not affect the price. The number of warrants issued per series, however, is limited, and this can affect the warrant price.

Euronext offers investors:

A dedicated segment
To allow investors to trade warrants and certificates as conveniently as possible, Euronext has built specific rules adapted to these kind of products.

Choice
Euronext offers a wide range of warrants and certificates based on varied national and international assets.

Trading

• Automatic order execution.
• For every warrant and certificate there are one committed liquidity provider that gives continuous quotes for a minimum order size.
• Wide range of order types.

Data dissemination
Complete information on each product can be found via Internet including product characteristics, historical data and direct link to the issuer web site.

Education
Euronext supports the warrants and certificates market by means of ongoing marketing and educational activities.