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Warrants give the small investor a line to blue chips
The JSE has approved a new tool which will allow the man in the street to limit risk and generate high returns, writes ZILLA EFRAT
Warrant is a US term for a call or put option which gives the holder the right to buy or sell a share at a future date for a predetermined price. Warrants are bought and sold in the same way as any other share, through any stockbroker. The new market is being spearheaded by stockbroker Deutsche Morgan Grenfell (DMG), which will start by listing warrants on five blue chip shares, with an underlying value of more than R3.5-billion, over the next few weeks. DMG plans to add warrants on other shares next year and the JSE confirms it has received approaches from other players to enter this market. DMG director Niall Smith says warrants are one of the fastest growing markets because of their ability to generate high returns while limiting risk. They made their debut in Germany and Britain about eight years ago and have recently been launched in Pacific Rim countries. arrants are call or put options which give the holder the right to buy or sell a share at a future date for a predetermined price. They are bought and sold in the same way as any other share, through any stockbroker. DMG structured-equity specialist Richard von Seidal says: "Warrants have become an ideal investment tool for the man in the street because they give him exposure to shares he may normally not be able to afford." They offer investors a highly leveraged rate of return because the premium paid - which will initially range between 50c and 500c - is much lower than the price of the underlying share. "Typically the warrant price moves faster in percentage terms than the underlying share's price. You still need to get the market right, but your profit will be larger," says Smith. Risk is limited because the maximum loss the holder can incur is the premium paid. There is no ceiling to the potential profit on a call warrant. The warrant's price is largely influenced by the price of the underlying share but it can also be affected by market conditions, economic factors, dividend payments and time to expiry. New JSE general manager of listings John Burke says warrants will be issued on counters with a market capitalisation of more than R2-billion. At present, about 60 JSE companies fit into this category. Warrants will have a maturity of between one and six years and will typically be "American style"- exercised any time up to the expiry date. Burke says warrants provide investors with another opportunity to hedge investments. As they have done elsewhere in the world, they should improve the market's efficiency and liquidity, widening its shareholder base. They will also enable institutions to free up cash for offshore investments while keeping active in the SA market. DMG will initially issue call warrants, but expects to introduce put warrants at a later stage. Call warrants give holders the right, but not the obligation, to buy the underlying share from the issuer at a predetermined price while put warrants come with the right to sell the share to the issuer at a set price. A call warrant will be profitable if the share price increases while a put option rises in value when the price falls. DMG warrants have the backing of its parent, Deutsche Bank. One of the largest players in the global market, it has issued over 1 000 warrants in more than 15 countries. It claims to be one of the world's most secure guarantors, thanks to its AAA rating from Standard and Poor and an Aa1 from Moodys.
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