This Statement seeks to provide you with a brief outline of some, but not all, of the risks associated with investing and trading in securities, investment funds, foreign currencies or commodities or entering into treasury and financial derivative transactions (“Transactions”). Financial derivatives are financial contracts the value of which depends on the return on or the value of currencies, securities, commodities, interest rates, reference indices or other financial instruments or benchmarks, including forwards, options and swaps or combinations thereof.
This Statement does not explain all the risks and other significant aspects of investing or trading in securities, investment funds, foreign currencies or commodities or entering into treasury and financial derivative Transactions (including issues of taxation or other legal consequences pertaining to any Transactions entered into).
Such risks can be substantial. Before entering into any Transaction, you should therefore be satisfied that you fully understand the precise nature of the Transaction, how it actually works, the extent of your exposure to risks and the potential losses that you could incur. You should also read the relevant product- specific literature and carefully consider whether any proposed Transaction is suitable for you in the light of your financial resources, experience, objectives for engaging in the Transaction, ability to bear risks and other relevant circumstances. You should also consult such professional advisers (including legal, tax, financial and accounting) as may be appropriate.
You are the non-professional counterparty of LIBERA INVESTMENTS NV. Except where LIBERA INVESTMENTS NV has expressly undertaken to the contrary, LIBERA INVESTMENTS NV does not act as your adviser, assumes no fiduciary responsibility towards you, and is not obliged to give you any advice or make any recommendations or suggestions to you. Even if LIBERA INVESTMENTS NV provides advice, recommendations and suggestions on your request or otherwise, you must remain ultimately responsible to conduct your own independent investigation into, and make your own appraisal of, any proposed Transaction, and you should rely only on your own judgment in entering into any Transaction. As such, the burden of all risks involved in any Transactions will be carried by you, and LIBERA INVESTMENTS NV is not responsible for any losses which you incur, of whatever nature and howsoever arising.
LIBERA INVESTMENTS NV acts simultaneously for a large number of clients, as well as for its own account. As such, conflicts of interest cannot be completely avoided. Your attention is drawn to Clause 6 of LIBERA INVESTMENTS NV’s “Terms and Conditions”, relating to “Conflicts of Interest”.
6. In effecting an off-exchange Transaction, LIBERA INVESTMENTS NV may be acting as your counterparty. Off- exchange Transactions may be less regulated or subject to a separate regulatory regime, compared to on-exchange Transactions. Before you undertake such Transactions, you should familiarize yourself with the applicable rules and attendant risks.
7. Transactions on markets in other jurisdictions, including markets formally linked to a domestic market, may expose you to additional risk. Such markets may be subject to a rule which may offer different or diminished investor protection. Before you trade, you should enquire from LIBERA INVESTMENTS NV about any rules relevant to your particular Transactions. Your local regulatory authority will be unable to compel the enforcement of the rules of the regulatory authorities or markets in other jurisdictions where your Transactions have been affected. You should ask LIBERA INVESTMENTS NV for details about the types of redress available in both your home jurisdiction and other relevant jurisdictions before you start to trade.
8. Any imposition by a country of exchange controls or other limitations or restrictions may cause payments to be made in the local currency instead of the original invested currency or may result in the inability to effect outward remittances of funds from such a country, which can affect the value of your investment or your ability to enjoy its benefit.
9. Adverse market conditions may result in your not being able to effect Transactions, liquidate all or part of your investments, assess a value or your exposure or determine a fair price, as and when you require. This may also arise from the rules in certain markets (for example, the rules of a particular exchange may provide for “circuit breakers” where trading is suspended or restricted at times of rapid price movements). If you have sold options, this may increase the risk of loss.
10. Placing contingent orders, such as “stop-loss” or “stop-limit” orders, will not necessarily limit your losses to the intended amounts, as it may be impossible to execute such orders under adverse market conditions. Strategies using combinations of positions, such as spread and straddle positions, may be as risky as taking simple long or short positions.
11. The normal pricing relationships between a derivative and the underlying assets may not exist in certain circumstances. For example, this can occur when a futures contract underlying an option is subject to price limits while the option is not. The absence of an underlying reference price may make it difficult to judge “fair” value.
12. Most open-outcry and electronic trading facilities are supported by computer- based component systems for the order-routing, execution, matching, registration or clearing of trades. As with all facilities and systems, they are vulnerable to temporary disruption or failure. The result of any system failure may be that your order is either not executed according to your instructions or not executed at all. Your ability to recover certain losses may be subject to limits on liability imposed by the system provider, the market, the clearing house and/or member firms. Such limits may vary. You should ask LIBERA INVESTMENTS NV before conducting Transactions for details in this respect.
22. During the life of an option, the writer must often provide collateral (margin cover). The margin is determined by the counterparty (including LIBERA INVESTMENTS NV) or, in the case of traded options, the exchange may determine the required margin. If margin cover proves insufficient, the writer may have to provide additional collateral (variation margin) or be faced with his position being closed-out. Certain exchanges in some jurisdictions permit deferred payment of the option premium, limiting the liability of the buyer to margin payments not exceeding the amount of the premium. The buyer is still subject to the risk of losing the premium and transaction costs. When the option is exercised or expires, the buyer is responsible for any unpaid premium outstanding at that time.
23. A call option is in-the-money if the current market value of the underlying asset is higher than the strike price. A put option is in-the-money if the current market value of the underlying asset is below the strike price. An option that is in-the-money is said to have an intrinsic value. If the current market value of the underlying asset and the strike price are the same, the option is at-the-money. An option may also be out-of-the -money. If purchased options expire out-of-the-money, you will suffer a total loss of your investment which will consist of the option premium paid plus transaction costs. If you are contemplating purchasing deep out-of-the- money options, you should be aware that, ordinarily, the chance of such options becoming profitable is remote.
24. The price of an option depends on its intrinsic value, and on its time value. The latter depends on a variety of factors, including the remaining life of the option and the volatility of the underlying asset. The time value of an option reflects the chance that it will be in-the-money.
25. In general, the value of a call option decreases, and the value of a put option increases, as the value of the underlying asset falls. The less an option is in- the-money, the larger the decrease in value. This decrease also generally accelerates as the life of the option expires, and is proportionally larger than the decrease in value of the underlying asset. However, in certain cases, the value of an option may decrease even if the value of the underlying asset remains unchanged or moves in favor of the buyer.
26. The risks associated with writing an option are generally greater than buying an option. If the option is covered by a corresponding position in the underlying asset, the risk may be reduced. Conversely, if the option is uncovered, then the possible loss may be unlimited.
27. If the writer of a call option has a corresponding quantity of the underlying asset at his disposal, the call option is described as covered. In such case, if the value of the underlying asset exceeds the strike price, the writer misses out on the upside potential as it must deliver the asset to the buyer at the strike price. However, the writer also bears the entire risk for any losses incurred on the underlying assets following a drop in market value. The losses are, however, reduced by the option premium received.
28. The writer of an uncovered call option does not own the underlying asset. In such case, the exposure is the spread between the strike price and the value of the underlying asset, less the premium received for granting the call option. Since the market value of the underlying asset can move well above the strike price, the writer’s potential loss is theoretically unlimited.
29. The writer of American-style options, in particular, must take into account the fact that the option may be exercised in very unfavorable, high-loss market situations in which physical delivery obligations may be very difficult or very costly to fulfil. It may sometimes even be impossible to acquire the necessary underlying asset.
30. The writer of a put option who does not have a short position in the underlying asset is subject to risk of loss should the price of the underlying asset decrease below the strike price upon exercise or expiration of the option by an amount in excess of the premium received. Conversely, the writer of a put option who has a short position in the underlying asset is subject to the full risk of a rise in the price of the underlying asset reduced by the premium received. In exchange for the premium received for the writer of a put option, the writer gives up all the potential gain resulting from a decrease in the price of the underlying asset below the option strike price upon exercise or expiration of the option.
40. Structured products may be traded either over-the-counter or on-exchange.
41. With structured products, buyers can only assert their rights against the issuer. Hence, particular attention needs to be paid to issuer risk. You need therefore be aware that a total loss of your investment is possible if the issuer should default.
42. Structured products with a Principal upon Maturity component often consist of an option combined with a fixed income instrument (eg. a bond).
43. The Principal upon Maturity component is provided by the bond and determines how much is paid out as a fixed sum when the structured product matures. You should note that the Principal upon Maturity can be well under 100 percent. of the capital invested, depending on the product. The Principal upon Maturity is also linked to the nominal value rather than the issue price or the secondary market price.
Principal upon Maturity does not therefore mean 100 percent repayment of the purchase price for all products.
44. The option component determines how and to what extent the buyer benefits from price movements in the underlying asset. In other words, it establishes the buyer’s potential return above the Principal upon Maturity component. The risks this component entails corresponds to those of other options or option combinations. Depending on the underlying asset’ market value, it can expire without value.
45. The market value of a structured product can fall below the level of its Principal upon Maturity, which can increase the potential loss on a sale before maturity. In other words, Principal upon Maturity is only available if the buyer holds the structured product until maturity.
46. Dual Currency Investments (or “DCIs”) are exchange-rate-related instruments that enable the buyer to obtain a higher return than on a money market instrument. When a DCI matures, the buyer will receive payment of principal and interest either in the primary or the alternative currency. If payment is in the alternative currency, the strike rate will be used for conversion.
47. A DCI can be viewed as a bond combined with grant of a short call option on the reference currency. If on maturity, the option is out-of-the-money, the buyer will receive the principal plus interest in the primary currency. On the other hand, if the option is in-the-money, the issuer of the DCI will exercise the call option and pay the holder of the DCI in the alternative currency.
48. DCIs are suitable for buyers who wish to see a high return on their investments and accept the risk of repayment in the alternative currency at the strike rate. Accordingly, it is LIBERA INVESTMENTS NV’s policy not to accept placement of any DCI unless the buyer has a use for the currencies in which the deposit may be repaid on maturity. The higher the potential earnings, the greater the risk that payment will be made in the alternative currency at the strike price.
49. DCI buyers do not enjoy downside protection, and thus investing in DCIs involves substantial risks.
50. Equity-linked notes (or “ELNs”) may be viewed as combining a debt instrument with an option that allows a bull (rising), bear (falling) or range bet. The return on an ELN is usually determined by the performance of a single security, a basket of securities or an index.
51. A bull ELN combines a traditional deposit with the premium received from writing a put option on the chosen securities. If the value of these securities falls to a level less than the strike price minus the premium received, the buyer will suffer a loss. The maximum potential loss could be the entire capital sum.
56. Non-traditional funds (which may take a variety of legal forms such as investment companies or partnerships) differ from traditional investment funds such as equity or fixed income funds in respect of their investment style. A common type of a non-traditional fund is the hedge fund, which, notwithstanding its name, does not necessarily have anything to do with hedging.
57. Some of the common features of, and risks of investing in, a non-traditional fund include the following:
58. Non-traditional fund investments involve a high degree of risk and may not be suitable for many members of the public. Before making any investments, you should seek independent advice about the particular risks involved and carefully study the Information Memorandum and Subscription Agreement and other information on the relevant investments. You should fully understand and be willing to assume the risks involved and the exposure to potential loss (which could involve the complete loss of your investment).
