Nick Downing of Appleton Asset Managers responds: The holder of Harmony options is entitled to purchase ordinary shares in Harmony at the "exercise price" of R60 a share at any time before the "expiry date" of the options.

(When you own shares you own part of the company; when you buy options, however, you own the option to buy shares in the future.)

At the close of business on Tuesday, July 15, the options were trading at R5.80 and the ordinary shares at R21.60. Given these prices, it is not economical to exercise your option because the shares can be bought in the market at a sizeable discount (at R21.60).

Why then pay R5.80 for the option?

Although they are not "in the money" (this is where the current share price is higher than the exercise price and a profit can be made), they nonetheless offer value.

Firstly, they provide "gearing" in that any price movement in the underlying ordinary shares will result in an amplified price movement in the options.

Second, they offer the investor exposure to the same underlying assets, but with a reduced capital outlay.

Third, the options are traded, meaning the investor does not have to exercise them to realise the investment (options can be bought or sold without actually buying the shares).

Options do, however, have a limited life. As the expiry date approaches, the "time value" runs out and therefore the likelihood of the options moving "into the money". The gearing, however, increases and so there will still be value in the options.

The fall in the option price has been amplified because of the gearing of the investment.

Donations tax

I AM A recently qualified doctor in hospital practice (state) and completed a tax return for the first time for the 1996/97 tax year. I gave my sisters and parents various amounts this year, totalling about R20 000.

I would like to know if this amount is tax deductible. I have read that gifts/donations of up to R25 000 can be deducted from tax, with amounts in excess of that being taxed at 25%. Is that correct?

Beric Croome of Kessel Feinstein responds: A taxpayer is allowed to make donations of up to R25 000 per tax year without donations tax being payable on them.

It is important to disclose the fact that you have made donations in your income tax return, as the return requires information on the donated amounts (as well as the person to whom the donations were made).

Where donations are made in excess of R25 000, donations tax at the rate of 25% is payable.

It must be pointed out, however, that donations are not deductible for income tax purposes unless they are to educational funds approved by the Commissioner of Inland Revenue. Donations to universities or other educational organisations, for example, would be deductible, but only where the donation does not exceed the greater of either R500 or 2% of your taxable income.

Donations made to family members are therefore not deductible for tax purposes, but are not liable to donations tax as long as the amounts donated do not exceed R25 000 per tax year.

ý We regret no personal correspondence can be entered into. The Sunday Times accepts no responsibility for the advice given in BT Money.

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