This questionnaire/tutorial has been created by Boost ETP to assist advisors and investors in understanding the benefits and the risks of investing in Short and Leverage Exchange-Traded Products (ETPs). ETPs include Exchange Traded Funds, Exchange Traded Commodities and Exchange Traded Notes.
Please review the Boost ETP Tutorial on Short and Leveraged ETPs before you begin the text.
There are a 10 multiple choice questions within the text.
Answers are provided at the end of the test.
1. Which of the following best describes how leverage is achieved in a 3x leveraged ETP - when an investment of £100 is made?
a) The investor receives £300 of exposure consisting of £200 cash and £100 of borrowed funds to achieve an investment of £300
b) The investor will receive £300 of exposure if they invest £300. This means that the investor must also borrow £200 in addition to their existing £100 and deposit £300 with the ETP provider to achieve an investment of £300
c) the investor receives £300 of exposure consisting of £100 cash and £200 of borrowed funds to achieve an investment of £300
d) the investor receives £300 of exposure consisting of £300 of borrowed funds to achieve an investment of £300
2. Which of the following is the most likely outcome for a Boost FTSE 100 3x Short Daily ETP if the FTSE falls by 2% in one day?
a) The Boost FTSE 100 3x Short Daily ETP is likely to post a 3% gain for the day
b) The Boost FTSE 100 3x Short Daily ETP is likely to post a 6% gain for the day
c) The Boost FTSE 100 3x Short Daily ETP is likely to post a 6% loss for the day
d) The Boost FTSE 100 3x Short Daily ETP is likely to post a 3% loss for the day
3. Which of the following is the most likely return (over two days) on a 3x leveraged product if the underlying index delivers a +1% return on day one and then delivers a -1% return on day two?
a) The 3x leveraged product is likely to deliver a positive return as the initial gain in the index will have a greater leveraged effect than the subsequent leveraged decline
b) The 3x leveraged product is likely to deliver a negative return as the initial gain in the index will result in a greater leveraged effect for the subsequent decline
c) The 3x leveraged product is likely to deliver exactly the same return as the underlying index
d) The 3x leveraged product is likely to deliver a positive return as the loss in the index does not influence the returns of a leveraged product
4. Which of the following characteristics do not apply to Short and Leveraged ETPs :
a) Listed on an exchange
b) Traded and settled like a share
c) No secondary market
5. Approximately what level of global assets is invested in Short and Leveraged ETPs and traded on most of the major global stock exchanges as at May 2013?
a) Less than $2bn
b) More than $500bn
c) More than $4trillion
d) More than $45bn
6. Crash Protection: What does the intra-day crash mechanism not provide for?
a) Prevent a S&L ETP from falling to zero on any single day
b) Limits the underlying index from crashing on any single trading day
c) Reduces the sensitivity of further falls during the trading day
d) Allows for participation in any rebound
7. ETPs: Boost Short and Leveraged ETPs are structured as:
a) Debt securities
b) UCITS ETPs
c) Both Debt securities and UCITS ETPs
d) Neither Debt securities nor UCITS ETPs
8. Liquidity: What of the following does not apply to an S&L ETP:
a) Created and redeemed on demand
b) Close-ended, there are a limited amount of ETPs
c) Arbitrageable, keeping prices true and fair
d) The underlying asset reflects the true liquidity of the ETP
9. Rebalancing Calculation: An investor buys £100 of a Boost FTSE 100 3x Leverage Daily ETP, when the FTSE 100 Index is at 10,000. At the end of the first day trading the FTSE 100 Index stands at 9,900. Assume no charge for debt interest.
a) Borrowed funds will be reduced to £194 after rebalancing at the end of day 1
b) Borrowed funds will be reduced to £99 after rebalancing at the end of day 1
c) Borrowed funds will be held at £200 after rebalancing at the end of day 1
d) Borrowed funds will be increased to £203 after rebalancing at the end of day 1
10. Compounding Calculation: An investor buys £100 of a Boost FTSE 100 3x Leverage Daily ETP, when the FTSE 100 Index is at 10,000. At the end of the first day trading the FTSE 100 Index rises to 10,100, at the end of the second day of trading the FTSE100 Index rises to 10,302, but falls to 10,199 at the end of the third day trading. Calculate the overall return to the investor (excluding fees and adjustments).
a) Investor return of 1.99%
b) Investor return of 16.00%
c) Investor return of 2.00%
d) Investor return of 5.91%
1. C With a 3x leveraged ETP – for every £100 invested the investor receives £300 of exposure consisting of £100 cash and £200 of borrowed funds (charged at the interbank lending rate) to achieve an investment of £300.
2. B If the FTSE 100 posts a 2% loss for the day the FTSE 100 3x Short Daily ETP is likely to post a 6% gain for the day.
3. B The most likely return (over two days) on a 3x leveraged product if the underlying index delivers a +1% return on day one and then delivers a -1% return on day two is a slightly negative compounded return. This is because the leveraged effect of the first day gives a greater exposure to the second days return.
4. C Short and Leveraged ETPs have both a primary and secondary market.
5. D Today there are more than $45bn of assets in Short and Leveraged ETPs which are traded on most of the major global stock exchanges.
6. B The crash protection only applies to the ETP, not the underlying index.
7. A Boost ETPs are structured as debt securities.
8. B S&L ETPs are open-ended allowing for new ETPs to be created to meet investor demand.
9. A £100 investment gives £300 of exposure. After the index falls by 1%, the price of the ETP will be £97. To obtain 3x exposure after rebalancing, borrowed funds of £194 will be required.
10. D 100 x 1.03 = 103.00 x 1.06 = 109.18 x 0.99 = 105.91: (105.91 / 100) - 1 = 5.91%.
This communication has been provided by Boost ETP LLP which is an appointed representative of Mirabella Financial Services LLP which is authorised and regulated by the Financial Conduct Authority.
The products discussed in this document are issued by Boost Issuer PLC (the “Issuer”) under a Prospectus approved by the Central Bank of Ireland as having been drawn up in accordance with the Directive 2003/71/EC. The Prospectus has been passported from Ireland into the United Kingdom and is available on the websites of the Central Bank of Ireland and the Issuer. Please read the Prospectus before you invest in any Exchange Traded Products (“ETPs”). Neither the Issuer nor Boost ETP LLP is acting for you in any way in relation to the investment to which this communication relates, or providing investment advice to you. The information is not an offer to buy or sell or solicitation of an offer to buy or sell any security or investment. You are advised to seek your own independent legal, investment and tax or other advice as you see fit.
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. An investment in ETPs is dependent on the performance of the underlying index, less costs, but it is not expected to match that performance precisely. ETPs involve numerous risks including among others, general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the ETP, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks.
ETPs offering daily leveraged or daily short exposures (“Leveraged ETPs”) are products which feature specific risks that prospective investors should understand before investing in them. Higher volatility of the underlying indices and holding periods longer than a day may have an adverse impact on the performance of Leveraged ETPs. As such, Leveraged ETPs are intended for financially sophisticated investors who wish to take a short term view on the underlying indices. As a consequence, Boost ETP LLP is not promoting or marketing Boost ETPs to Retail Clients. Investors should refer to the section entitled "Risk Factors" and “Economic Overview of the ETP Securities” in the Prospectus for further details of these and other risks associated with an investment in Leveraged ETPs and consult their financial advisors as needed.
This marketing information is derived from information generally available to the public from sources believed to be reliable although Boost ETP LLP does not warrant the accuracy or completeness of such information. All registered trademarks referred to herein have been licensed for use. None of the products discussed above are sponsored, endorsed, sold or promoted by any registered trademark owner and such owners make no representation or warranty regarding the advisability on dealing in any of the ETPs.
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