Because put warrants and knock-out puts gain in value when the price of the underlying instrument declines, it's possible to use these products to hedge individual share positions or entire portfolios against losses. When issuers sell structured products, they're never betting against the investor. Rather, they hedge themselves in the background through the purchase and sale of shares, options and/or futures so that the total hedged position responds as precisely as possible to the value of the specific product they sold. Therefore, from an economic point of view, it doesn't matter to the issuer whether the buyers of the product were right or wrong in their market assessment. Thus these operations on the part of the issuer are also referred to as hedging.
Volatility in financial market terms is a yardstick for measuring the magnitude of the fluctuations in a financial instrument. Historical volatility indicates the extent to which the price of a given financial instrument has gyrated in the past. Volatility readings can be calculated for various time frames; frequently, 100- or 250-day historical volatility is used.
Hit warrants become due and payable prematurely if the underlying instrument reaches or penetrates a predetermined price threshold. In such an instance, the investor receives payment of a specified amount; otherwise, the product expires worthless at the end of the term.