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New option available

28 June 2004 Angelo Coppola

Absa adds a call and put warrant to track the movement of the gold price in South African rand and which will offer investors the option to buy or sell Kruger Rands on the JSE.

The offering has been developed by Absa Corporate and Merchant Bank,” says Petrus Balt, Absa group treasurer.

He adds that increasing demand for exposure to spot gold bullion in the past few months have prompted the introduction of the product, especially because gold shares have failed to perform as originally expected.

“The demand for gold bullion and products related to it has increased tremendously in recent months, with speculators seeking innovative avenues whereby to trade heavy volatility centered on movements in the dollar gold price,” says Richard Swain, responsible for marketing and sales at ACMB Equity Derivatives.

“Recent rand strength and geo-political factors such as the flight to quality listings on foreign bourses, management and political issues, the pending mining charter and the effects of the HIV/AIDS pandemic on the mining industry have stifled growth in local gold shares.

Nevertheless, a weakening USD and continuing turmoil in the Middle East have kept all eyes on bullion, with investors thus seeking to invest rather in spot gold itself.”

Why Kruger Rand warrants?

According to Swain, key reasons for issuing warrants on the Kruger Rand include affordability, the ability to speculate in a cost effective manner on future prices of the Kruger Rand, and the fact that the product can be traded directly through a registered stockbroker.

Kruger Rand exposure also offers insulation against inflationary pressures.

With local benchmark indices expected to increase through rising Producer and Consumer Price Inflation (as evidenced by the general expectation of higher interest rates towards the latter half of 2004) gold could well be looked upon as an excellent hedge in an environment of high inflation, says Swain.

The main advantage of warrants is that these instruments are geared options and therefore trade on a leveraged basis to movements in the price of the Kruger Rand. They’re also listed securities, enabling ease of access to retail investors.

Option trading allows investors to participate in movements in the price of the underlying asset, without having to actually own the underlying asset itself.

Moreover, the price of the Kruger Rand has historically been tightly linked to the domestic currency price of gold.

“The listing of a call and a put warrant will allow investors to benefit from rising or falling markets, and experts on the Absa Warrants Desk will endeavour to offer a tight bid-offer spread to improve liquidity and transparency,” stresses Balt.

About warrants

Warrants are investment options sold as a security and traded on a registered bourse. The financial instrument is able to amplify the movements in the underlying assets on which the asset is based, but limits the downside risk to the amount invested.

Though speculative in nature, warrants are essentially financial instruments that allow investors to modify their risk profiles through the leverage gained.

There are two basic types of warrants- call and put warrants.

Call warrants give the buyer/ holder the right, but not the obligation, to the underlying asset/ share at a fixed price, known as the strike price on a future/ expiry date.

Put warrants give the buyer the right, but not the obligation, to sell the underlying asset at a fixed price on a future date.

The benefits of warrants include increased exposure to various underlying assets, no margin calls, easy trading and lower transaction costs.

These instruments are well leveraged, which means that their changes in price are much greater than those of the underlying assets in percentage terms.

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