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Boost the Returns on Your Equity Portfolio with SG Warrants

Boost the Returns on Your Equity Portfolio with SG Warrants. 1800 TALK SG www.warrants.com/au. Disclaimer.

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Boost the Returns on Your Equity Portfolio with SG Warrants

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  1. Boost the Returns on Your Equity Portfolio with SG Warrants 1800 TALK SG www.warrants.com/au

  2. Disclaimer SG Australia Equities Limited (ABN 88 090 099 317) ("SGAEL") takes responsibility for publishing this presentation. It is not be be directly or indirectly distributed to any person other than securities licensees, exempt dealers, exempt investment advisers and securities representatives as defined in the Corporations Law. At the time of publication the ASX and ASIC have not approved the issue of the securities the subject of this presentation. SGAEL has not taken into account your investment objectives, financial situation or particular needs and for this reason SGAEL suggests that you seek your own independent financial and taxation advice prior to investing in these securities. SGAEL and its related entities may hold interests in, and may profit from, the trading of warrants and their related securities at any time. No part of this presentation is to be construed as a solicitation, recommendation, offer or invitation to buy or sell any security. The information in this presentation is, to SGAEL’s knowledge, reliable and accurate as at the time of publication but this cannot be guaranteed. The views of SGAEL reflected in this presentation may change without notice. To the maximum extent possible at law, SGAEL and its related entities do not accept any liability whatsoever arising from the use of the material or information contained in this presentation.

  3. Introducing SG SG is a global bank • SG is the investment banking arm of Société Générale • Société Générale is one of the largest banks in the world with more than AUD 900 billion in assets • Société Générale is a French bank but most of its activities are outside of France • In Australia, SG operates through its Australian subsidiary, SG Australia. • “Founding Father” of the covered warrants market, SG is leader worlwide • SG Australia is fully guaranteed by Société Générale • Société Générale is rated AA- by Standard & Poors

  4. Introducing SG SG is a leading warrants issuer in Australia • Entered the market in June 2000 • Introduced the first warrants over international shares in July 2000 • Introduced instalment warrants in October 2000 • Note : Instalment warrants can help reduce your tax bill ! • Introduction of SG CaPELSTM in April 2001 • Overall market share: over 20% Thanks to a simple strategy: educate • Free monthly seminars • Free monthly newsletter, the Navigator • Regular presence at investment fairs • Free call 1 800 TALK SG (1 800 8255 74) • State-of-the-art website www.warrants.com/au

  5. SG Warrants - the sea of options Whatever your risk profile, there’s a warrant to suit you! Risk Equity Warrants Index Warrants Currency Warrants Instalment Warrants TM SG CaPELS Shares Reward

  6. SG Warrants - the sea of options SG CaPELSTM • A stock market investment with a money back guarantee! • No subscription or management fees • AUD exchange rate guarantee for international shares • investment horizon: 5 years Trading Warrants • at issuance, costs a small fraction of the share price • price movements will be 3 to 6 times those observed on the share • successful investments require having good timing and visibility • investment horizon : 1 week to 4 months Instalment Warrants • at issue, costs roughly half the share price yet you receive full dividends and franking credits • tax effective as interest component embedded in the warrants is tax-deductable • “cash extraction” facility • investment horizon: 1 to 5 years

  7. SG Warrants - the sea of options Where to find info? www.warrants.com/au

  8. Trading Warrants Take advantage of movement in a share’s price without owning it! Call (Put) Warrants are used to take advantage of a rise (fall) in the value of the underlying security (can be shares, indices or currencies).

  9. Definitions Determining Factors of a Warrant’s Price Maturity Fixed Parameters Price of the Underlying Security Exercise Price Warrant Price Dividends Interest Rates Implied Volatility Market Variables

  10. Interest Rates Strike Maturity Dividends Volatility Spot       Put      all  Definitions Determining Factors of a Warrant’s Price Impact of an increase in one of the factors on the warrant price (all others remaining constant) Call Put

  11. Share A Share B Volatility - Intuitive Notions • Volatility implies the approximate average magnitude of the daily variations of the underlying security • VOLATILITY of 16% = Daily price variations of +/- 1% • VOLATILITY of 45% = Daily price variations of +/- 2.8% • The higher the volatility, the greater the average movements of the underlying security.

  12. Historical vs Implied Volatility HISTORICAL VOLATILITY: How is it calculated? • Standard deviation of the share’s returns over a given period of time. Past fluctuations are in no way indicative of future fluctuations BUT • The historical volatility may give the issuer an indication of the underlying’s future volatility. How is the underlying security going to perform during the life of the warrant? i.e.: What type of price movements can we expect? • The issuer must consider the different possible market risks. As a general rule: IMPLIED VOLATILITY > HISTORICAL VOLATILITY Note: there are circumstances where this will not be true

  13. Warrant Pricing The price be broken down into two components: INTRINSIC VALUE TIME VALUE + “Visible” Component “Invisible” Component the price of the warrant (multiplied by the conversion ratio,if applicable) less the intrinsic value (for call warrants) the price of the underlying share less the exercise price (for call warrants) For a Parcel of Warrants

  14. Terminology There exists a series of terms used to describe the relationship between the Exercise Price and the price of the underlying security. Eg: 6-mth Call over MIM with an Exercise Price of $1.00 For Puts the more the share price drops below the exercise price of the warrant, the more the latter moves into-the-money

  15. Sensitivity Coefficients Each coefficient has been assigned a Greek letter and gives theoretical answers to the question: “How much will the price of the warrant change if any one of the pricing parameters change?” Coefficients: • Delta - share price moves by $1 • Theta - one day goes by • Vega - implied volatility moves by 1 point Note - these coefficients are not constant but are always changing !

  16. Delta “How much will the price of my warrant change if the share moves $1.00?” Example: TAHWGA (Delta 7% with TAH at $9.64*) If the TAH share rises $1(+10%), one TAHWGA warrant will rise by $0.07. As such, the returns on the TAHWGA investment are higher in percentage terms than those obtained from a direct investment in TAH. At 11/05/01 In addition, the Delta approximates the mathematical probability that the warrant will expire in-the-money. With a Delta of 10%, we can say that the warrant has roughly a 10% chance of ending up in-the-money.

  17. Theta “How much will my investment lose as time goes by?” - Theta: rate at which warrant loses value due to passage of time, expressed in $ per day. Theta is not constant: as the warrant nears expiry, the rate of time decay accelerates. Rule of thumb: warrants will lose 1/3 of their time value during the first half of their life and 2/3 during the second. • Example: NDYWGA ($0.80 call, 1:1, expiry 28/06/01) with NDY at $1.04 on 11/05/01 Theta is $0.001 - I.e. the warrant loses this amount on the 12th and marginally more the next day etc etc… Holders of out-of-the-money warrants that are near expiry should keep a close eye on the theta of the warrant!

  18. Vega “How much will the price of my warrant change if implied market volatility increases or decreases ?” The Vega measures the expected variation of the warrant price following a one-point variation in the implied volatility level. Example: TLSWGB ($6.50 Call, 2:1 exp 28/06/01 with TLS at $6.51 on 11/05/01) • Vega 0.0047 • Warrant Price $0.155 • Conversion Ratio 2:1 If the implied volatility rises (falls) by one percentage point, the price for a warrant will rise (fall) by $0.0047.

  19. Useful Tools - Gearing How much can I increase my exposure to a share if I buy warrants instead of making a direct investment? Gearing = Share Price (Warrant Price x Conversion Ratio) (or “Parcel”) Example: SG TAHWGA Call (Expiry 28/06/01; Strike $10.50) • Indicative Share Price* $9.64 • Conversion Ratio 4:1 • Indicative Warrant Price* $0.06 • Gearing $9.64/($0.06*4) or 40.2 This means, for the same investment amount, you can have exposure to over forty shares (through warrants) instead of one (direct investment).

  20. Useful Tools - Elasticity What will happen to my warrant if the underlying moves by 1%? The warrant’s Elasticity answers this question... Elasticity = Gearing (per parcel) x Delta (per parcel) SG TAHWGA Call has a Delta of 7% per warrant (i.e. 28% per parcel) Elasticity = 40.2 x 0.28 = 11.26 Hence for a 1% move in TAH each parcel of TAHWGA will move 11.26%!

  21. Leverage Example: Leverage using TLS Call Warrants Paul is bullish on TLS, trading at $6.52. He believes it can break $7 by July 2001. He decides to buy the TLSWGJ Call warrant.

  22. Leverage/Interaction of the Coefficients In this example, the SG Warrant over TLS rose by 72%, compared to 7.5% for TLS. Important Note: a large move in the underlying does not guarantee a large positive move in implied volatility!

  23. Hedging Put warrants can be used to protect the value of your share portfolio against adverse market movements or against a long stock position. • Puts can act like an insurance policy as they guarantee a minimum value for your security, which is equal to the Exercise Price of the Put. The price of this “insurance” is equal to the price of the warrant. • With put warrants, you are “transforming” the downside risk as the put warrant will appreciate with the drop in the market and thus off-set the depreciation of the portfolio.

  24. Hedging Example: SG NCP Put Warrant Dan believes there is downside in NCP, currently trading at $18.57. He owns 100 shares. He decides to invest in SG Put Warrants over the share to offset a potential drop in his portfolio. To hedge his NCP holdings he needs to choose a put warrant which is close-to-the money, and observe the conversion ratio. Dan buys NCPWGT puts to benefit from a fall in NCP To determine how many warrants are needed to hedge the portfolio, Dan uses the following formula:N = value of holding x conversion ratio/Exercise Price = 1857 x 4/ 18 = 413

  25. Hedging Dan benefits from a fall in NCP through NCPWGT In this example, NCPWGT Put Warrants rose by over 39% as a result of a 5.4% fall in the price of NCP shares. This rise would offset the drop of $100 in Dan ’s NCP holding. As his NCPWGT holding would rise in value from $101 to approximately $140.39 (NB: Delta is not constant).

  26. How can I trade SG Warrants? SG Warrants are ASX-listed and are available through your broker or your financial planner. Before investing you will be given a copy of the ASX Explanatory Booklet “Understanding Trading & Investment Warrants” and asked to sign a Warrant Client Agreement Form. As warrant terms are not standardised, investors are advised to familiarise themselves with the particular characteristics of each warrant, as set out in each warrant’s Offering Circular. Find out about the Special Offers we have with Participating Brokers!

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