Why did it explode? Understand the Snowball Product in 3 Minutes - Huxiu.com#
Omnivore#
This article introduces the basic concepts and investment principles of Snowball products, as well as the risks and returns that investors may face.
• 💰 Snowball products are a type of financial investment product that can generate high returns.
• 📉 The returns for investors depend on the rise and fall of the underlying asset prices.
• ⚠️ Snowball products are high-risk products and are only suitable for qualified investors.
Recently, there has been a crazy rumor in the industry about securities firms and their clients using Snowball.
Let's speculate on the general plot:
So what exactly is a Snowball product? Why is it possible to lose both principal and interest?
Let's review today:
Snowball products are actually a type of financial investment product.
The reason they are called "Snowball" is because the returns of this financial product can grow like a rolling snowball. The longer the holding period, the higher the potential profit, as long as there is no snowball-like market crash.
Snowball products are income certificates issued by securities firms, and investors contribute money to purchase them in order to gain returns.
The term is usually 12 or 24 months.
Securities firms and investors agree on a reference annualized return rate, such as 15%.
The reference return rate can only be obtained under certain conditions. The actual returns for investors are uncertain, and the performance of the "monkey" determines the returns.
The "monkey" is the "underlying" that the Snowball product is linked to.
The "underlying" can be a specific stock or an index, such as the CSI 500 Index.
Stocks or indices can fluctuate, just like monkeys can go up and down.
The returns for investors are based on the rise and fall of the "underlying".
This is a bit like a "bet" between securities firms and investors.
So how do we "bet"?
The starting point for investors to purchase Snowball products is the belief that the "underlying" has a small risk of decline. Therefore, the Snowball product is equivalent to the investor selling a put option to the securities firm.
But this option is a bit special, we call it a barrier option.
The monkey cannot go up or down freely, we need to set up some barriers for the monkey.
The starting point of the monkey's flight is called the "initial price".
The hand above is called the "upper barrier", with a price slightly higher than the initial price, such as 103% of the initial price;
The hand below is called the "lower barrier", with a price generally much lower than the initial price, such as 80% of the initial price.
Setting the upper and lower barriers is to trigger corresponding rules when the price of the "underlying" reaches a certain level within a specific time period.
The monkey shuttles between the upper and lower barriers, and now let's see how different flight paths affect investor returns:
- Volatile Market
The monkey keeps flying between the two hands, which means that the stock or index does not rise or fall much, but fluctuates up and down.
In this case, when the contract expires, investors can obtain the agreed reference annualized return rate, such as 15%.
- Bull Market
In a rising market, the monkey breaks through the upper barrier on a specified observation day, which we call a knock-out.
The upper barrier price can also be called the "knock-out price".
For example, if a "knock-out" occurs 6 months after the contract is established, the Snowball product needs to be terminated in advance, and investors will receive interest up to the early termination date.
The knock-out price is the price barrier for early termination of the contract.
Although investors can also receive interest based on the reference annualized return rate, if the knock-out occurs too quickly, it is not good news for investors as they won't earn much interest.
- Bear Market
In a declining market, the monkey breaks through the lower barrier on a specified observation day, which we call a knock-in.
The lower barrier price can also be called the "knock-in price".
If the market is volatile and the underlying asset experiences a significant decline, a knock-in occurs, and investors may suffer losses when the contract expires.
However, after a knock-in occurs, it is not completely impossible to salvage the situation before the contract expires.
We can consider several scenarios:
- Minor Rebound
After a knock-in occurs, the monkey tries to fly upwards, but until the contract expires, the monkey's price remains lower than the initial price.
At this time, investors need to bear the loss.
The loss is equal to the difference between the expiration price and the initial price.
- Moderate Rebound
After a knock-in occurs, the monkey also tries to fly upwards, and finally reaches a price higher than the initial price before the contract expires, and no knock-out occurs during this period.
At this time, investors can only get back their principal without any interest.
- Significant Rebound
After a knock-in occurs, the monkey makes relentless efforts and finally breaks through the upper barrier on a specified observation day, resulting in a knock-out.
At this time, the Snowball product ends, and investors can still receive the annualized reference return rate.
As we can see, whether investors can make a profit depends on the knock-out and knock-in situations.
But observant readers will notice that there is a concept of "specified observation day" when confirming knock-outs and knock-ins.
Securities firms only determine knock-ins and knock-outs on observation days.
The monkey's knock-out or knock-in is only effective on observation days. On non-observation days, no matter how much the monkey jumps around, it is not considered a knock-out or knock-in.
Observation days can be divided into "knock-out observation days" and "knock-in observation days".
Knock-out observation days are usually once a month, while knock-in observation days are more frequent, such as daily.
In summary, the advantage of Snowball products is that they add a buffer space for investments.
Only when the market is continuously declining without any rebound, will losses occur, providing a certain degree of downside protection.
However, Snowball products are still a type of high-risk product and cannot guarantee profits. In the event of a major market decline, investors may face losses.
Therefore, Snowball products are not suitable for everyone, and individuals need to meet the requirements of qualified investors to purchase them.
Securities firms strive to make profits through Delta hedging, but we will discuss Delta hedging another time.
Just understand that securities firms don't just keep the money in a safe, but rather go to the secondary market to buy low and sell high.
Finally, let's summarize today's content:
For Snowball products, regulatory requirements require securities firms to pay attention to the suitability of clients, emphasize the risks of the products, and manage risk exposure.
After all, Snowball products are high-risk products and are not suitable for ordinary individual investors.
The opening scene of this article is said to be a Snowball product with a 4x leverage, which means using leverage from stock index futures to invest in Snowball. For example, with a 4x leverage, 250,000 yuan in margin can be used to purchase 1 million yuan worth of Snowball products, which naturally amplifies the risk and may result in the loss of both principal and interest.
Currently, the risk of knock-ins in Snowball products has increased, but the main impact of Snowball products is on the price trend of stock index futures, not directly affecting the spot market.
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