Key points at a glance
- A knock-out is a contractual event for the security; a later recovery does not undo it.
- A turbo may have the same financing level and barrier; an ordinary mini future usually has a gap between them.
- Any residual payment can depend on the actual unwind price, not automatically on the barrier level.
- The ISIN-specific terms identify the reference price, observation hours, residual formula and payment date.
The barrier ends the security before the recovery
The event
Touching the barrier ends this example product.
Settlement
Assumed termination price €94: (€94 − €90) × 0.1 = €0.40 per security.
What does “the barrier was hit” mean?
The barrier is a threshold linked to early termination. For a long product it is usually below the current underlying price; for a short product it is usually above. Long generally benefits from rising prices and short from falling prices.
The issuer terms define which price observations count. Many products trigger when the level is briefly touched or crossed in the unfavourable direction during stated hours; they do not wait for the daily close. Special structures can use different rules.
The knock-out here is a security issued by an issuer. You pay its purchase price in full and have a claim against that issuer. You do not own an exchange-traded option contract. Its leverage partly reflects that the security price represents only part of the underlying exposure.
Turbos and mini futures can leave different amounts
In some turbos, the barrier is at the financing level. This level is used to derive the product value. Reaching it often leaves little or no economically meaningful residual amount under those product rules.
An ordinary long mini future usually has a stop-loss barrier above its financing level. That gap is a buffer, not a guarantee. After knock-out, the issuer unwinds its hedge and determines any residual amount according to the terms.
A fast fall or gap opening may lead to an unwind well below the barrier. The remaining amount can then shrink dramatically, potentially to an economic total loss.
| Structure | Barrier and financing level | Possible settlement |
|---|---|---|
| Turbo with matching barrier and financing level | No separate buffer between the levels | Often no meaningful residual; check the precise term |
| Ordinary long mini future | Stop-loss barrier above financing level | Amount determined after unwinding; a positive amount is not certain |
| Special structure | Observation can differ | Determine the outcome from its own terms |
Scroll the table sideways to read every column.
A €0.40 residual: the complete worked example
Suppose you own 100 hypothetical long mini futures on a share. Their financing level is €90, barrier €95 and ratio 0.1. With the share initially at €100, assume a purchase price of €1 per security. You have paid €100 before fees.
The share touches €95 and triggers knock-out under the assumed continuous observation. The issuer unwinds its hedge at an assumed weighted price of €94. Under this simplified long-product formula, (€94 − €90) × 0.1 = €0.40 per security.
For 100 securities, that means a €40 payout and a €60 loss against the assumed €100 purchase, before fees. Using the €95 barrier incorrectly as a guaranteed settlement price would give €50. That €10 difference shows why the unwind price matters.
| Item | Assumption or calculation |
|---|---|
| Financing level / barrier | €90 / €95 |
| Ratio / number held | 0.1 / 100 securities |
| Assumed unwind price | €94 |
| Residual per security | (€94 − €90) × 0.1 = €0.40 |
| Total payout | €0.40 × 100 = €40 |
| Result against purchase | €40 − €100 = −€60 before fees |
Scroll the table sideways to read every column.
This is not a real offer. It assumes euro settlement, unchanged example levels until the event and the stated long-product formula. Minimum amounts, charges and rounding depend on the product.
A tiny payment may still mean an economic total loss
An issuer may specify a very small technical payment. HSBC’s FAQ, for example, states €0.001 per security for certain knocked-out turbos and open-end turbos; for some mini futures, that may also be the least favourable outcome. This describes those product families, not a universal rule.
Such a tiny payment can mean nearly the entire purchase cost is lost. It is not effective capital protection. Conversely, a positive mini-future residual is not a refund of your original investment.
If the share later recovers to €100 or more, the ended security does not regain value. The barrier event has already terminated the original construction. Your remaining claim is whatever the knock-out settlement terms provide.
What to check in your account and documents
After knock-out, the security may remain visible in your portfolio for a while even though normal trading has stopped. That display does not establish the final residual payment. The issuer first determines the event and settlement; the booking then passes through your custodian.
Valuation and payment times differ by product. HSBC’s FAQ gives an automatic credit within five banking days for certain open-end turbos. Another ISIN may follow another process. Check your own terms and the issuer’s notice.
Open-end means no fixed ordinary maturity, but a knock-out or contractually allowed termination can still end the security. Financing may adjust the financing level and sometimes the barrier over time. Use the levels applicable on the event day.
- Record the ISIN and exact product name.
- Check the issuer’s knock-out notice and relevant reference price.
- Read observation hours and the rules for a touch, gap or close.
- Check the residual formula, established unwind price and any minimum.
- Match the payment date to the credit shown by your custodian.
Further detail: Keep barrier and unwind prices separate
The barrier defines the event. The unwind price may instead be a weighted price achieved as the issuer closes its hedge during a specified period. For an ordinary long mini future, the positive gap between that price and the relevant financing level, adjusted by the ratio, can determine the residual. A short product reverses the direction of that difference.
Minimum payments, currency conversion, rounding, deductions and exceptional market disruption rules are not universal constants. Smart-mini structures may observe barriers differently. The key information document, base prospectus and final terms together matter; a general product FAQ cannot replace them.
What to learn next
- Compare CFDs, knock-outs and ordinary warrants
Separate barrier, margin and time value using the same share.
- Understand calls and puts
Separate product direction from its contractual structure.
Glossary
- Barrier
- The threshold that triggers the knock-out event.
- Financing level
- The level used to derive the product’s value.
- Unwind price
- The price used when the hedge is closed after the event.
- Residual payment
- Any amount due after knock-out under the particular product terms.
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