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What are mini futures?

Mini futures are derivative leverage products that enable investors to participate disproportionately in rising (long) or falling (short) prices of an underlying asset. They offer transparency, flexibility and a wide range of possibilities. Pricing is based directly on the underlying asset, which ensures transparency. Thanks to the large number of possible underlying assets, such as shares, indices, commodities or currencies, they can be used in a variety of ways. In addition, mini futures can be traded on each trading day under normal market conditions.

Mini futures at a glance

As one of the leading providers of mini futures, UBS KeyInvest offers you a wide range of products on various asset classes and underlying assets.

How do mini futures work?

The way mini futures work is based on two central features: The financing level and the stop loss.

Financing level: Investors invest in an underlying asset at a fraction of the price, while the rest is provided by the issuer. This leads to a leverage effect, as the mini future participates fully in the price movements of the underlying asset.

Stop loss level: Mini futures have no fixed expiration date and can theoretically run indefinitely. However, they have a loss limit. If the underlying asset reaches the stop loss, the mini future expires automatically. The issuer then calculates the residual value and, if it is above zero, pays this to the investor.

Long mini future for rising prices

With mini futures, a clear idea of the performance of the underlying asset is crucial. Investors who bet on rising prices buy long mini futures, which participate disproportionately in price gains. Higher leverage increases the chances of profit, but also the risk of disproportionate losses when prices fall.

  • Long mini futures: The financing level and the stop loss are below the current underlying price. If the price reaches the stop loss, the mini future expires automatically and any residual value is paid out. In the event of sharp price falls, a total loss may occur if the issuer is unable to unwind the hedge in good time.
  • Price calculation: The price of a long mini future is the difference between the current underlying price and the financing level, divided by the subscription ratio.
  • Formula: Price long mini future = (current underlying price – financing level) / subscription ratio

 

Graphics: Long mini future for rising prices
Graphics: Short mini futures for falling prices

Short mini futures for falling prices

The value of a short mini future rises when the underlying asset falls, and falls when the underlying asset rises. They are bought in anticipation of falling prices and can be used to hedge a portfolio.

  • Short mini futures: The financing level and the stop loss are above the current underlying asset price. The risk of a stop loss event arises when prices rise.
  • Price calculation: The price of a short mini future is the difference between the financing level and the current underlying asset price, divided by the subscription ratio.
  • Formula: Price short mini future = (financing level – current underlying price) / subscription ratio

The leverage effect explained

An investment in a mini future is similar to a direct investment in the underlying asset. If the underlying asset, for example a share, rises by CHF 1, a long mini future – with a subscription ratio of 1 – also rises by CHF 1. However, the investor only pays a fraction of the price of the underlying asset; the issuer finances the rest. This leads to a leverage effect: The higher the financing share of the issuer, the greater the leverage.

  • Example: A share is trading at CHF 100, the financing level of a long mini future is CHF 90. The price of the mini future is thus CHF 10. If the share rises by CHF 1 to CHF 101, the mini-future rises by CHF 1 to CHF 11 – a gain of 10 percent. If the share falls by CHF 1 to CHF 99, the mini future falls by CHF 1 to CHF 9 – a loss of 10 percent.
  • Leverage calculation: The closer the financing level is to the current price of the underlying asset, the greater the leverage. However, this increases the risk of a stop loss event in the event of small price movements.

It is important to carefully weigh up the opportunities and risks of leverage.

The lever can be calculated using this simple formula

Grafik: Hebel formula

Leverage effect: Weighing up opportunities and risks

The closer the financing level (and the stop loss) is to the current price of the underlying asset, the greater the leverage effect of a mini future. However, this also increases the risk that even small price movements will trigger a stop loss event and lead to losses. It is therefore important to carefully weigh up the leverage opportunities against the stop loss risk.

Financing costs: Borrowed capital has its price

Graphics: Daily adjustment for a long mini future

Anyone who provides outside capital expects an appropriate return, and this also applies to mini futures. The issuer therefore charges financing costs, which consist of a reference interest rate (e.g. SARON for CHF or SOFR for USD) plus a financing spread. The spread may vary and is specified in the product term sheet.

  • Daily adjustment: As mini futures have unlimited terms, the financing costs are priced in on a daily basis. The financing level is adjusted daily by the pro rata costs, which slightly reduces the value of the long mini futures. The stop loss is adjusted accordingly to keep the distance the same.
  • Dividend compensation: In the case of dividend payments, the dividend discount is deducted from the financing costs on the ex-date in order to compensate for the loss in value of long mini futures. Similar adjustments are made for capital measures such as share splits.
  • Short mini futures: Daily adjustments are also made here. Theoretically, there could be a financing yield, but in practice the financing spread exceeds the interest income, which reduces the price of the mini futures. Dividend payments are deducted from the financing level on the ex-date and are charged to the holder.

Important terms at a glance

Underlying asset

The underlying asset is the reference value of a mini future and is the main determinant of its price performance. Underlying assets can be shares, indices, currency pairs, interest rates or commodities.

Financing level

The financing level corresponds to the leveraged portion of the mini futures and is adjusted daily by the financing costs. The difference between the financing level and the underlying asset price, taking into account the subscription ratio, gives the theoretical value of a mini future.

Stop loss

Mini futures are equipped with a stop loss. For long mini futures this is above the financing level, for short mini futures below. If the underlying asset reaches the stop loss, the mini future expires immediately and is usually redeemed at a residual amount. The issuer adjusts the stop loss daily in order to keep the distance to the financing level the same.

Expiration/term

As open-end products, mini futures have no fixed expiration date. However, premature expiration occurs in the event of a stop loss event or premature termination by the issuer («Issuer Call Right» ).

Subscription ratio

The subscription ratio indicates how many mini futures relate to one unit of the underlying asset. With a subscription ratio of 10:1, 10 mini futures are required for one unit of the underlying asset. This makes the individual mini-future cheaper and more flexible to trade.

Hedge your securities portfolio with short mini futures

Short mini futures are an efficient and cost-effective instrument for hedging a portfolio or certain portfolio components such as index investments. Here is an example:

  • Example: An investor has an ETF on the SMI™ worth CHF 50,000 and would like to hedge it against a price correction. With a leverage of 10, he needs short mini futures worth around CHF 5000 (CHF 50,000 / leverage 10). If the SMI™ falls by 10 percent to CHF 45,000, the value of the short mini futures rises by 100 percent to CHF 10,000, thereby offsetting the losses. If only half of the SMI™ position (CHF 25,000) is to be hedged, mini futures worth CHF 2,500 are required.
  • Capital employed: The capital required for hedging depends on the desired hedging level and the selected leverage.
  • Advantages:Requires low capital and provides immediate protection.
  • Risks: The capital used for hedging may be largely lost if the underlying asset rises.

This simple type of hedging makes sense even over short periods of time.

Advantages and risks

  • Advantages

    • High potential return on capital employed (leverage effect)
    • Unlimited term (apart from stop loss event and any right of termination of the issuer)
    • A stop loss protects against the obligation to make additional contributions and, as a rule, against total loss.
    • High price transparency (no influence of volatility)
    • Very suitable for hedging (short mini futures)
    • Tradable daily under normal market conditions

  • Risks

    • High losses if the underlying asset moves in the opposite direction
    • Regular monitoring necessary
    • Issuer risk
    • Total loss possible in the event of a stop loss event
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Frequently asked questions

Summary

Mini futures offer a flexible way to respond to market movements or hedge a portfolio. When used correctly, the leverage effect can generate disproportionately high profits. A solid understanding of market risks and careful analysis is essential.

Useful information for you

Disclaimer

Disclaimer

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