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With Knock-out products (Turbos and Mini-Futures), you can indirectly invest in stocks, indices and other assets using leverage. This means potential higher gain but also potential higher loss. In the worst case investors may lose the entire capital they invested. There are additional financial risks associated with investing in these products, which can be found below.
Products providing for a Knock-out (“Knock-outs”), which include Open-End-Turbos, Turbos and Mini-Futures, are leveraged products. These products are sometimes also known under various other names, such as Wave, Wave XL or Unlimited Turbo. Generally, investors in Long-products are expecting an increasing underlying price, while investors in Short-products are expecting decreasing underlying prices.
Knock-outs provide for a leveraged participation in the performance of the underlying above (in the case of a “Long-product”) or below (in the case of a “Short-product”) the strike. For Mini-Futures and Open-End-Turbos, the strike is adjusted on a regular basis to accommodate financing charges, based on the applicable interest rate, the financing spread, and the dividend payments on the underlying. Knock-outs are suitable for experienced and active investors who have knowledge of highly leveraged financial investment products and understand that changes in the underlying prices have an effect on the value of the Knock-out product, due to the leverage.
Knock-out products also feature a Knock-out level, often referred to also as barrier, which is equal to the strike in case of Open-End-Turbos and Turbos. In case of Mini-Futures the Knock-out level is above (Long-products) or below (Short-products) the strike. You can filter for one of these two types by using the Type-filter: “With Stop-Loss” refers to Mini-Futures and “Without Stop-Loss” refers to all other Knock-outs. In the case of a breach of the Knock-out level, the product will be knocked out and the investor will receive 0.001 Euro in the case of Open-End-Turbos and Turbos or, subject to the payment of a potential residual amount, zero in the case of Mini-Futures, i.e. the investor may lose the entire capital invested. The Knock-out level is adjusted on a regular basis in case of Open-End-Turbos or at least once a month in case of Mini-Futures.
In the secondary market Knock-outs usually behave as follows: Rising underlying prices generally increase the value of a Knock-out Long, whereas falling underlying prices generally reduce the value of the Knock-out Long. Vice versa, falling underlying prices generally increase the value of a Knock-out Short, whereas rising underlying prices generally reduce the value of the Knock-out Short. In addition, other factors such as implied volatility will influence the secondary market behaviour of Turbos and Open-End-Turbos.
Example: If the price of the Deutsche Aktienindex (DAX®) rises, the value of a DAX®-Knock-out Long usually increases as well, whereas falling DAX®prices usually reduce the value of a Knock-out Long. Vice versa, falling DAX®prices usually increase the value of a Knock-out Short on the DAX®, whereas rising underlying prices usually reduce the value of the Knock-out Short.
In the case of Mini-Futures and Open-End-Turbos the issuer has the right to call in the products. Investors are usually entitled to exercise Knock-outs.
Potential total loss: Due to the leverage, high losses are possible. In the worst case, the total loss of the invested capital is possible.
Potential Knock-out event: In the case of a breach of the Knock-out level, the product will be knocked out and the investor will receive 0.001Euro in the case of Open-End-Turbos and Turbos or, subject to the payment of a potential residual amount, zero in the case of Mini-Futures, i.e. the investor may lose the entire capital invested.
Premium: Investors pay a premium in case of Turbos and Open-End-Turbos, which covers financing costs as well as the costs of the gap and liquidity risk. The premium is not constant and may change over time depending on the market situation or product characteristics.
Change of leverage: The change of the underlying price changes the leverage of the Knock-outs.
Termination right of Issuer: The Issuer has the right to terminate the Mini-Futures and Open-End-Turbos at short notice.
Issuer risk: A total loss is possible if the Issuer of the Knock-outs and the Guarantor, The Goldman Sachs Group, Inc., become insolvent.
Liquidity risk: Trading in the secondary market may be limited and investors bear the risk that they cannot buy or sell the products at any time and at a specific price (see information on Secondary Market for products issued by Goldman Sachs also here).