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Leveraged and inverse products (L&I Products) typically seek to achieve their stated investment objectives on a daily basis. The leverage factor of L&I Products during a trading day will change as the market moves. If you buy or sell a L&I Product during a trading day, you may not be able to get the multiple or opposite of the return of the underlying index until the next rebalancing.

Examples:

Trading a 2x leveraged product when the market has gone up during a trading day

At the start of a trading day, assuming that the leveraged product’s net asset value (i.e. index level) is $100, its exposure to the underlying index is twice of its NAV, i.e. $200.

If the underlying index rises by 4% at 2:30pm, the leveraged product will make a gain of 8% and its NAV and exposure to the underlying index will also rise to $108 ($100 x (100% + 8%)) and $208 ($200 x (100% + 4%)) respectively. The leverage factor will become 1.93x ($208/$108), instead of 2x. As such, if you trade the leveraged product at 2:30pm, your expected return would be equal to 1.93 times the underlying index’s return until the next rebalancing.

Trading a 2x leveraged product when the market has gone down during a trading day

At the start of a trading day, assuming that the leveraged product’s net asset value (i.e. index level) is $100, its exposure to the underlying index is twice of its NAV, i.e. $200.

If the underlying index drops by 4% at 2:30pm, the leveraged product will make a loss of 8% and its NAV and exposure to the underlying index will also drop to $92 ($100 x (100% - 8%)) and $192 ($200 x (100% - 4%)) respectively. The leverage factor will become 2.09x ($192/$92), instead of 2x. As such, if you trade the leveraged product at 2:30pm, your expected return would be equal to 2.09 times the underlying index’s return until the next rebalancing.

Trading a 1x inverse product when the market has gone up during a trading day

At the start of a trading day, assuming that an inverse product’s net asset value (i.e. index level) is $100, its short exposure to the underlying index is also $100.

If the underlying index rises by 4% at 2:30pm, the inverse product will make a loss of 4% and its NAV and short exposure to the underlying index will be $96 ($100 x (100% - 4%)) and $104 ($100 x (100% + 4%)) respectively. The leverage factor will become -1.08x (-$104/$96), instead of -1x. As such, if you trade the inverse product at 2:30pm, your expected return would be equal to -1.08 times the underlying index’s return until the next rebalancing.

Trading a 1x inverse product when the market has gone down during a trading day

At the start of a trading day, assuming that an inverse product’s net asset value (i.e. index level) is $100, its short exposure to the underlying index is also $100.

If the underlying index drops by 4% at 2:30pm, the inverse product will make a gain of 4% and its NAV and short exposure to the underlying index will be $104 ($100 x (100% + 4%)) and $96 ($100 x (100% - 4%)) respectively. The leverage factor will become -0.92x (-$96/$104), instead of -1x. As such, if you trade the inverse product at 2:30pm, your expected return would be equal to -0.92 times the underlying index’s return until the next rebalancing.