Key points at a glance
- A factor such as 3× applies to each calculation period, not automatically to the entire holding period.
- From €100 to €110 is +10%; back to €100 is −9.09%, not −10%.
- In the simple 3× model, a €100 product becomes €130 and then €94.55.
- The price path, financing and possible intraday adjustments also belong to the real product mechanics.
Change the move and compare both daily calculations
Hypothetical 3× long factor, both starting at €100. On day two the underlying returns to exactly €100. Costs and intraday adjustments are omitted.
| Time | Underlying | 3× model value |
|---|---|---|
| Start | €100.00 | €100.00 |
| Day 1 | €110.00+10.00% | €130.00+30.00% |
| Day 2 | €100.00-9.09% | €94.55-27.27% |
Scroll the table sideways to see all columns.
Underlying overall: 0%. Factor model overall: -5.45%.
Calculation: day two = day-one value × (1 + 3 × the underlying’s daily return). Unrounded internally; display rounded to two decimals.
What does a factor certificate represent?
You buy a security issued by an issuer. Its value follows a defined factor calculation on a reference asset, often through a factor index. The issuer owes the contractual payment. You own neither the share nor an exchange-traded option contract.
Similar products may be called factor warrants. The crucial feature is their daily calculation. An ordinary call warrant has a different mechanism in which strike, time remaining and implied volatility matter. A factor product instead has a stated multiplier for the daily reference move.
A long factor product benefits from rising daily reference prices; a short product reverses the direction. Throughout this example we use only a hypothetical long product with factor 3, keeping the two directions separate.
The share returns to €100; the product ends at €94.55
Begin with both the assumed underlying and factor-model value at €100. On day one, the underlying rises to €110, a 10% gain. Multiplying that daily return by three gives +30% in our cost-free model, so the product value reaches €130.
On day two, the underlying falls from €110 back to €100. That €10 fall is measured against €110, so the daily return is −10 / 110 = −9.0909…%. The same number of euros up and down represents different percentage moves.
The product loses three times day two’s percentage return, or −27.2727…%, applied to its new €130 value: €130 × (1 − 3 × 10 / 110) = €94.5454… . Rounded to cents, it ends at €94.55, down about 5.45% while the underlying is unchanged overall.
| Time | Underlying / daily return | 3× model / daily return |
|---|---|---|
| Day 0 | €100.00 / start | €100.00 / start |
| Day 1 | €110.00 / +10.00% | €130.00 / +30.00% |
| Day 2 | €100.00 / −9.09% | €94.55 / −27.27% |
| Overall | 0.00% | −5.45% |
Scroll the table sideways to read every column.
All figures are hypothetical. Daily returns are rounded only for display. The model omits fees, financing, dividends, currency effects, intraday adjustments and actual market quotes.
What the daily reset actually changes
The reset changes the calculation base for the next period. It does not restore your security to €100. The next percentage rise or fall acts on the already changed product value.
Here the product base grows from €100 to €130 before the second calculation. The amplified decline therefore hits a larger amount. Multiplying only the underlying’s overall 0% return by three would give 0% and miss this compounding.
This is called path dependence: the underlying’s start and end prices alone are insufficient to determine the factor-product outcome. Returns in each calculation period matter. Within this simple model, multiplying the same daily factors gives the same answer regardless of their order; there is no separate penalty caused merely by their sequence.
Sideways here means fluctuating, not flat each day
A fluctuating market can bring the underlying back to its starting price after several moves. Daily leverage may leave the product below its start. This is often called a volatility or compounding drag.
It is not a fixed loss each day. If the underlying is exactly unchanged on both days in our cost-free model, the product also stays at €100. Move the slider to 0% to see it. Actual fees or financing can still change a real product.
A consistent trend also compounds daily returns and can produce an outcome above or below “factor × overall return.” The mechanism is not merely a loss formula. You need the period and price path to understand what a fixed daily factor did.
Charges, adjustment rules and term add more effects
A real factor product can include financing and calculation charges in its index or capital value. Bid–ask spread, dealing fees and currency effects may also apply. We omit them to show the daily factor clearly; this is not a full valuation of an ISIN.
A strong adverse move can trigger an extra intraday adjustment under the terms. A new reference level and calculation base are set. That is not automatically the same event as a turbo knock-out, and it does not refund the loss already incurred.
Many factor products are open-ended, but fixed expiry is also possible. Open-ended does not prevent an issuer’s contractual termination. At termination or maturity, the product terms govern repayment. Issuer default risk exists in addition to market movement.
- Check the precise reference and calculation time, not just the stated factor.
- Consider financing, fees and spread separately.
- Read intraday adjustment rules in the index methodology or terms.
- Check term, termination rights and payout for the actual ISIN.
Further detail: Daily returns multiply
Without additional components, one period follows: new value = previous value × (1 + factor × underlying daily return). Across periods, these daily factors multiply. This simplified expression applies only while no separate adjustment rule is triggered.
For our return trip, the second underlying return is exactly −10/110. The final product value is therefore €100 × 1.30 × (1 − 3 × 10/110) = €94.5454… . The table rounds for display, while the calculation uses unrounded fractions. Real methodologies may add financing, fees, distributions and event rules.
What to learn next
- Compare CFDs, knock-outs and warrants
See why the same share-price goal can lead to different outcomes.
- Understand volatility
Separate fluctuating prices from a promised direction.
Glossary
- Daily reset
- Setting a new calculation base for the next period, not restoring your account value.
- Path dependence
- The outcome depends on each daily move, not just the first and last prices.
- Factor
- The multiplier applied to each period’s return in the simplified model.
- Adjustment threshold
- A product-specific trigger for an extra intraday recalculation.
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