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Leverage effect of mini futures: Benefit & function
With mini futures, you can bet on rising or falling prices of an underlying asset. The leverage results from the reduced capital investment.
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.
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.
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.
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.
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.
It is important to carefully weigh up the opportunities and risks of leverage.
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.
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.
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:
This simple type of hedging makes sense even over short periods of time.
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.
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