Popular Trading Strategies THE TRADER S GUIDE

Transcription

1 Popular Trading Strategies THE TRADER S GUIDE

2 This document is not an offer of securities or an invitation to apply for Macquarie Instalments or Macquarie Warrants. Macquarie Instalments and Macquarie Warrants are issued by Macquarie Bank Limited ABN ( Macquarie ) and you should obtain a product disclosure statement (including the supplementary product disclosure statement (if any) for the series of Macquarie Instalments or Macquarie Warrants you want to acquire) ( PDS ) from and consider it before making any decision about whether to acquire, or to continue to hold, that financial product. To acquire Macquarie Instalments or Macquarie Warrants, investors must complete the application form included in or accompanying the PDS. This general advice has been prepared by Macquarie and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider its appropriateness having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any investment decision. This document does not alter the PDS in any way and should not be read in substitution for the PDS. Potential investors should consult the PDS for full details of investment and the multiple assumptions on which performance information is based. No returns shown in this document are forecasts or predictions of performance. Actual performance may differ materially. The information may be based on assumptions or market conditions and may change without notice. References to any entity (other than Macquarie) or security are included solely to identify the securities to which a hypothetical Macquarie Instalment or Macquarie Warrants relates. They should not be construed as any express or implied endorsement by the entity of Macquarie Instalments or Macquarie Warrants or by Macquarie of the entity, its securities or products and services. Macquarie or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles including as investment banker, underwriter or dealer, holder of principal positions, broker, lender or adviser. Macquarie or its associates may receive fees, brokerage or commissions for acting in those capacities. In addition, Macquarie or its associates, officers or employees may buy or sell the financial products as principal or agent and as such may effect transactions which are not consistent with any recommendations in the information. Macquarie Bank Limited does not give, nor does it purport to give, any taxation advice. The taxation discussion in this document is based on laws current at the time of writing. Those laws and the level of taxation may change. The application of taxation laws to each investor depends on that investor s individual circumstances. Accordingly, you should seek independent professional advice on taxation implications before making any investment decisions. To the extent permitted by law, Macquarie accepts no responsibility for errors, misstatements, negligent or otherwise, nor for any direct, indirect, consequential or other loss arising from the use of any research information in this document. Information current as at 1 March Macquarie Group 2

3 Contents Introduction 4 Trading Warrants 7 Types of Trading Warrants 9 Why Use Trading Warrants? 11 Warrants v Exchange Traded Options (ETOs) 12 Key Terms 13 Warrant Pricing 13 Time Decay and Delta 16 Exercising and the Assessed Value Payment 18 Strategies and Case Studies 19 Instalments 29 Types of Instalments 31 Why Use Instalments? 32 Key Terms 34 Instalment Pricing 35 Strategies and Case Studies 37 Ready to Start Trading? 42 3

4 Introduction Do you currently trade shares, options or Warrants? Are you planning to start actively trading in the near future? If so, this guide should be a helpful tool. The Trader s Guide has been designed to help you understand the art of trading. By explaining how trading Warrants and Instalments work, and with detailed strategies on how to use these instruments, our Trader s Guide aims to make you a more confi dent trader. The Importance of Risk Management Before we get started, it s important to highlight the importance of risk management for good, sustainable trading. The market has performed well in recent years, and as a result, many short term traders have made signifi cant gains. However, if you ve been trading in the market for longer than just the past few years, you d know what it s like to experience a bear market, with its highly volatile returns. Powerful lessons were learnt during the crash of 1987, the tech wreck, and September 11. Those who invested heavily in speculative stocks, or over-exposed themselves by taking on larger positions than they could afford, learnt the hard way the enormous risks involved in trading. From that experience, many traders now employ much tighter risk management techniques within their portfolios, such as stop-losses, as well as using trading instruments that have a pre-determined downside. Unlike futures, CFDs or gearing into stocks through margin lending, your total losses with Warrants and Instalments, if the market turns against you, are known up-front. That is, there are no margin calls if your positions move against you. What you pay up-front is as much as you can lose Subject to, in the case of Instalments, you providing your TFN/ABN or a relevant exemption.

5 Important Tips Before You Get Started As a short term trader, it s important that you employ some risk management techniques before you get started. 1 Make sure you have a strong view on the underlying stock you are trading positive (if buying calls); negative (if buying puts). 2 Understand the instrument you are trading. Identify the strike / exercise price, maturity date, conversion ratio, exercise style (European or American) and whether it is a call or put. 3 Have a pre-determined stop loss in place, and if your Warrant or Instalment price falls to this level, make sure you act on your stop loss to avoid further losses. 4 Importantly, monitor your positions regularly. Want to Subscribe To Our Free Traders Tips and Stock Reports? As a trader, it s vital you receive a regular supply of trading ideas, to keep abreast of market trends. Every day, we provide our trading clients with free s combining strong stock ideas, based on quality Macquarie research. To subscribe, visit On this website you will also fi nd a wide range of educational handbooks, strategies, and tools to help you learn more about trading. 5

6 What Products are Available? Macquarie offers a wide range of investment structures tailored to meet the needs of traders and sophisticated investors, depending on their investment objectives, anticipated returns, risk profi le and time frame. The following diagram will give you a sense of the number of products in the market and where they sit on the risk return scale. With such a broad range of products on offer, it s important that traders focus on those which may be best suited to trading by nature. For that reason, the remainder of this guide will focus primarily on trading Warrants and Instalments. For more information on the other products listed above, please contact Macquarie s Equity Markets Group on or visit Current Products Available - Risk vs Reward CFDs Index Turbo Warrants Equity Warrants Currency Warrants Index Warrants Risk Income Instalments Trading Instalments Self Funding Instalments (SFIs) Managed Fund Instalments (MFIs) Capital Protected Products Shares Hi-Notes Cash Reward Illustrative only. This fi gure is not to scale and does not represent a comparison of the relative differences in the risk of each product listed. 6

7 Trading Warrants 7

8 Trading Warrants are similar to options contracts, except that they are typically issued by an investment bank like Macquarie Bank (the issuer) and are traded on the ASX, like shares. The issuer of the Warrant determines the structure and terms of each particular Warrant issue. Warrants allow you to generate potentially higher returns in your portfolio, as well as gain access to far bigger trades than possible with a direct investment in shares. With Warrants, losses are also limited to your initial investment which is only a fraction of the face value of the underlying shares. In essence, trading Warrants give you exposure to an underlying asset for a fraction of the price. This concept, known as leverage, enables traders to dramatically increase their exposure to the underlying asset. Trading Warrants are popular with traders who want to speculate on the future direction of an underlying asset. This view can be positive or negative, as different types of Warrants enable traders to benefi t from either a rise or fall in the value of the underlying asset. Generally, call Warrants increase in price as the underlying asset appreciates, while a fall in the underlying asset price will generally cause an increase in the value of a put Warrant. The underlying assets over which trading Warrants are available include: Equity Warrants shares ranging from blue chips like Telstra, BHP or Commonwealth Bank to the more speculative, smaller market cap stocks Index Warrants the S&P/ASX200 index covering the leading 200 shares on the ASX. Index Turbo Warrants the S&P/ASX200 index, with an in-built knock-out feature Currency Warrants the Australian/US Dollar exchange rate Did you know? Trading Warrants were fi rst listed on the ASX in 1991 by Macquarie Bank. Since then their popularity has increased dramatically. In fact, over $5 billion worth of trading Warrants, representing almost 4.5 billion Warrants, were traded on the ASX in

9 Types of Trading Warrants There are four main types of trading Warrants. Equity Warrants Equity Warrants are one of the most heavily traded instruments in the market. With the underlying asset being a share, equity Warrants give the holder the right to buy (calls) or sell (puts) a share for a fi xed price on or before a future date. The leverage provided by equity Warrants is generally very high. The price you pay for an equity Warrant is considerably less than the underlying share to which it is linked, yet you can capture up to 100% of the price movement of the underlying share. This means that for a given movement in the underlying share price, you can potentially make a greater profi t as a percentage of your capital invested. However, if the underlying share price moves in the wrong direction, Warrant holders are exposed to greater potential losses. Index Warrants Index Warrants, like equity Warrants, also offer traders the potential to benefi t from a rise or fall in the underlying index by trading calls or puts at different times. The most commonly traded index Warrants in Australia are linked to the S&P/ASX200 index. Index Warrants are generally cash settled at expiry. Index Turbo Warrants A more recent innovation in the Australian Warrants market is the turbo Warrant. Turbo Warrants have an in-built knockout feature. This means that if the underlying asset trades at the Warrant s knockout level (usually the exercise price), the Warrant will automatically terminate and the Warrant holder will lose any value associated with their holding. Turbo Warrants therefore carry far greater levels of risk than regular trading Warrants. However, turbo Warrants typically have higher delta than regular trading Warrants, as well as lower levels of time decay. Index turbo Warrants are typically available over the S&P/ASX200 index and are generally cash settled at expiry. 9

10 Currency Warrants Currency Warrants offer exposure to an underlying currency by giving traders the right to exchange an amount of foreign currency for Australian dollars on or before the expiry date. Currency Warrants are used for leverage, or for hedging currency transactions. The value of the currency Warrant rises and falls in line with movements in the underlying exchange rate. The most common underlying in Australia is the AUD/USD exchange rate. Currency Warrants are generally cash settled at expiry. Call and Put Warrants Call Warrants A call Warrant gives the holder the right (but not the obligation) to buy the underlying asset for a fi xed price (the exercise price) either up to (American style) or at (European style) a specifi c future date (the expiry date). The price of a call Warrant generally rises if the underlying asset price rises, and falls if the price falls. Put Warrants A put Warrant gives the holder the right (but not the obligation) to sell the underlying asset for a fi xed price (the exercise price) up to (American style) or at (European style) a specifi c future date (the expiry date). Therefore, traders who believe the price of the underlying asset is falling will generally buy put Warrants. The price of a put Warrant will rise if the price of the underlying asset falls, and fall if the asset price rises. 10

11 Why Use Trading Warrants? Leverage One of the main attractions of trading Warrants is the high degree of leverage they provide. That is, small percentage changes in the underlying asset result in larger percentage changes in the value of a Warrant (which could be positive or negative). If you don t have the capital to purchase a big portfolio of shares, you can use leverage through Warrants to gain the size of exposure you are wanting. This also means that you are able to gain exposure to large blue-chip stocks without the large price tag. Example - XYZ shares are trading at $22. A call Warrant over XYZ shares is trading at 18c and has a delta of 14%. Purchasing 100,000 Warrants would cost $18,000 dollars. This gives the holder exposure to 14,000 XYZ shares. (100,000 Warrants x delta of 14%). That s the equivalent of $308,000 worth of exposure to XYZ shares for an $18,000 investment. You should be aware that leverage also means that if the underlying share falls, the value of a Warrant will decrease at a greater rate than the share. Wide Range Available As Warrants are issued by fi nancial institutions, and not the ASX, there are a wide range of Warrants to choose from, with varying strikes and maturities. This offers traders a wide selection to suit their various needs. Liquidity and Market Making Liquidity refers to how easily an asset can be converted to cash. Typically, if there are a large number of buyers and sellers for a particular stock, this trading activity will provide high liquidity. Obviously, investing in low liquidity assets carries more risk. With Warrants, the issuer of the Warrant is obligated to ensure a reasonable bid and volume are maintained in each series of Warrants. This means traders may be able to enter and exit the market with relative ease even if the Warrants are not traded in large volumes. 11

12 Warrants v Exchange Traded Options (ETOs) While trading Warrants and ETOs demonstrate similar characteristics, there are signifi cant differences between them. Trading and Settlement Warrants trade and settle in the same way that shares do. This makes the transaction process simple to access and execute. Warrants can be traded on the ASX during market hours of 10am 4.10pm (EST). ETOs settle through the Australian Clearing House (ACH). ETOs are traded between 10am 1pm and 2pm 4pm (EST), with market maker obligations, and from 1 2pm and 4pm 4.20pm without market maker obligations. Issuance and Terms ETO terms are standardised and set by the ASX, whereas the terms of Warrants are set by the issuer and vary from one Warrant to another. This means you get a much wider range of choices in the Warrants market and a wider range of underlying shares, maturity dates and strikes from which to choose. Market Making Market makers for ETOs and Warrants have different obligations in terms of providing markets. ETO market makers are assigned stocks which they must meet certain obligations for certain percentages of time. However they are not required to provide quotes in all series at all times. Therefore, there can be no guarantee that all ETO series will have prices displayed. ETO market makers are also only required to keep a bid-offer spread ranging from a maximum of 5c 20c depending on the stock and its price. This can create liquidity problems for small investors who may have to cross a wide spread when buying and selling. In contrast, Warrant markets are managed by the issuer of the Warrant. Warrant issuers are obligated by the ASX to maintain at least one reasonable bid for each Warrant series for 90% of the time during ASX market hours. Typically, Warrant issuers will keep a bid/offer spread refl ective of the spread in the underlying share. 12

13 Key Terms Exercise Price: The price at which a Warrant holder has the right to buy (call) or sell (put) the underlying asset (subject to any Conversion Ratio). The exercise price is also known as the strike price. Expiry Date: The last day that a Warrant may be exercised. After a Warrant has reached its expiry date it will cease to trade and the right to buy or sell the underlying asset will lapse. Exercise Style: An American Style Warrant can be exercised at any time up to and including the expiry date. A European Style Warrant can be exercised only on the expiry date. The majority of equity trading Warrants on the ASX are American style. Conversion Ratio: The number of Warrants required to control one underlying parcel of assets. For example, if an equity Warrant with a 5:1 conversion ratio was to be exercised, the holder would require 5 Warrants to buy 1 underlying share. Warrant Pricing There are two major components making up the price of a trading Warrant. They are the intrinsic (or real) value and the time value. The price of a Warrant can be represented by the following equation: Intrinsic Value Price of Warrant = Intrinsic Value + Time Value The intrinsic value is the difference between the underlying asset price and the exercise price of the Warrant, divided by the conversion ratio. If the difference between the underlying asset price and the exercise price of the Warrant is negative, the intrinsic value is said to be zero. With call Warrants, the intrinsic value indicates how much the share price is above the exercise price divided by the conversion ratio. Example A call Warrant over XYZ has an exercise price of $20 and a conversion ratio of 2:1. If the XYZ share price was trading at $22 the Warrant would have an intrinsic value of $1 ($22 - $20 divided by 2). If XYZ was trading below $20, the exercise price, the Warrant would have no intrinsic value. 13

14 With put Warrants, the intrinsic value is the amount the underlying asset price is below the exercise price divided by the conversion ratio. Example A put Warrant over XYZ has an exercise price of $20 and a conversion ratio of 4:1. If the XYZ share price was trading at $18 the Warrant would have an intrinsic value of 50c ($20 - $18 divided by 4). If XYZ was trading above $20, the Warrant would have no intrinsic value. Warrants with intrinsic value are described as being in the money. The greater the intrinsic value, the deeper in the money the Warrant is said to be. A Warrant with no intrinsic value is said to be out of the money. Traders use the term at the money where the share price is trading at the same level as the exercise price. Time Value Time Value = Price of Warrant - Intrinsic Value Time value is the value of the continuing exposure to the movement in the underlying asset which is provided by the Warrant. The amount of time value depends primarily on where the underlying asset price is in relation to the exercise price of the trading Warrant. This is a complex calculation taking into account, among other things, the time until expiry, expected dividends, expected share price volatility and interest rates. The greater the amount of time until expiry, the greater the time value will be. Without exception, a Warrant will lose a portion of its time value each day. By the time you reach expiry, the time value will have decayed to zero. Did you know? At expiry, if a Warrant has no intrinsic value it will be worthless (i.e. it is out of the money) 14

15 Other Factors Infl uencing Pricing Implied Volatility This is a statistical measure of the expected movement in the price of the underlying asset during the life of the Warrant. This expectation of future share price movements will be factored into the price of a Warrant. If there are any changes to those expectations, there will be a corresponding change in the price of the Warrant. An increase in implied volatility will generally cause the price of call and put Warrants to increase. A decrease in implied volatility will generally cause the price of call and put Warrants to fall. Dividends While holders of trading Warrants do not receive the dividends paid on the underlying shares, dividends are factored into the price equation of a Warrant. As a general rule, the larger the expected dividend during the life of a Warrant, the cheaper the price of the call Warrant, while a put Warrant will be more expensive. This is because the share price will generally fall by the amount of a dividend once the ex-div date has passed. As dividends due are factored into a Warrant s price, the movement in the underlying share price caused by a share going ex-dividend will not ordinarily affect the price of the Warrant. Note, if actual dividends differ from those factored in, the stock going ex-dividend may have a material effect on the price of a Warrant. Interest Rates If interest rates rise, the price of a call Warrant will generally increase and the price of a put Warrant decrease. Conversely, a fall in interest rates will generally reduce the price of a call Warrant and increase the price of a put Warrant. Generally, changes in interest rates will have less impact on the price of short maturity Warrants than long maturity Warrants. 15

16 Factors influencing pricing (assuming all other factors constant) Call Price Put Price Underlying Share Price Increases Time Until Expiry Decreases Implied Volatility Increases Dividend Expectations Increase Interest Rates Increase Time Decay The time value component of a Warrant will gradually decline over the life of the Warrant until it reaches zero at expiry. This decline in value is known as time decay or theta. Effectively there is an associated cost for every day a Warrant is held. Therefore, the longer a Warrant is held the greater the cost to the holder. Even if the underlying share moves in the desired direction, the time in which it takes to do this is very important, as the affects of time decay may offset the affects of an increase in the share price. Time value declines at an increasing rate as time passes during the life of the Warrant. Trading Tip A Warrant will decay every day throughout its life whether or not the market is open. 16

17 Delta Delta represents the change in the Warrant price relative to movements in the underlying asset price. The delta of a call Warrant is represented by a percentage of 0% to 100%. For put Warrants the delta is negative and is represented by a percentage of 0% to 100%. Example If a call Warrant has a delta of 20% and the underlying share price increases by 10c, the Warrant should increase by 2c (10c x 20%). If a put Warrant has a delta of 10% and the underlying share price falls by 15c, the Warrant should increase by 1.5c (-15c x -10%). A call Warrant that is out of the money will generally have a delta of less than 50%. The further out of the money the Warrant is the lower the delta will be. A Warrant that is deeply out of the money will have a delta closer to 0% while a Warrant that is at the money will generally have a delta of 50% (-50% for puts) A call Warrant that is in the money will generally have a delta greater than 50%. The deeper in the money the Warrant is the higher the delta will be and the more the Warrant will move in relation to the share price. A Warrant that is deep in the money will have a delta close to 100%. A Warrant with a delta of 0% will move negligibly in relation to a movement in the underlying share price. In contrast a Warrant with a delta of 100% or -100% will virtually move cent for cent in relation to a movement in the underlying share price. Delta is not a constant and will change over time as the relationship between the exercise price and the underlying share price changes. Movements in the underlying share price will cause a change in the delta of a Warrant. 17

18 Exercising and the Assessed Value Payment Most Warrants are not exercised unless the Warrant is in the money and the holder wants to obtain the underlying shares. To exercise your Warrant, you must lodge an Exercise Notice form with the appropriate money with the issuer on or before the expiry date of the Warrant. Investors still holding Warrants that have lapsed, post expiry date, will receive an assessed value payment, provided the volume weighted average price of the underlying share over the last two hours of trade on the expiry date makes the Warrant in-the-money by at least 5%. If the Warrant is greater than 5% in the money the holder will receive 90% of the Warrant s intrinsic value. This intrinsic value is based on the weighted average price of the underlying share for the fi ve trading days following the Warrant s expiry date. Note that currency Warrants and index related Warrants are treated differently. 18

19 Strategies and Case Studies All the following examples are hypothetical and use pricing and fi gures selected by Macquarie to illustrate how Macquarie Trading Warrants and Instalments work. The examples should not be taken as personal advice or an indication of actual or future prices. These examples should not be regarded as an accurate statement of affairs concerning any listed company. All Warrant and Instalment codes and terms in these examples are illustrative only and do not represent the actual terms of any Warrant or Instalment on the ASX. Please refer to the relevant Product Disclosure Statement and Supplementary Product Disclosure Statement prior to purchasing Macquarie Warrants or Macquarie Instalments. The actual fi gures that apply to your investment may differ materially. Daily time decay (theta) is strictly not constant through time, however for simplicity, all of the following examples assume a constant daily time decay when calculating the estimated time decay for the trading period. Please be aware that Theta and Delta are measures of risk. Please seek independent fi nancial advice if you need more information. 19

20 Call Warrants 1. Increase profits from rising share prices Bill has $20,000 in trading capital to risk and has a very bullish view on the AMP share price in the near term. AMP is currently trading at $10 per share and Bill believes the share price is going to appreciate to around $11 in the near term. Instead of purchasing $20,000 of AMP shares, Bill decides to purchase $20,000 of AMP call Warrants. Warrant Code AMPWME Exercise (Strike) Price $10.00 Expiry Date 29 March 2007 Conversion Ratio 3:1 Delta 18% Daily Time Decay (Theta) $0.002 Purchase Date 10 January 2007 Warrant Type Call Current AMP share price $10.00 Warrant Price $0.20 Amount Invested $20,000 No. Warrants Purchased 100,000 On 20 January 2007, after holding the Warrant for 10 days, the AMP share price has risen to $11. Bill s profi t from trading the AMP call Warrant ($16,000) is signifi cantly greater than the profi t from simply trading AMP shares ($2,000), as seen below. Purchasing 2,000 AMP shares for $10 and selling for $11 Purchase Cost $20,000 $20,000 Sales Proceeds $22,000 $36,000 Profi t $2,000 $16,000 Percentage Profit 10% 80% Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. Purchasing 100,000 AMPWME call Warrants for 20c and selling for 36c 20

21 Remember, however, that potentially greater profi ts carry the risk of greater potential losses. Had the AMP share price fallen from $10 to $9.50 over this period, Bill s percentage losses would have been far greater from the Warrant compared to buying the AMP shares, as shown below. Purchasing 2,000 AMP shares for $10 and selling for $9.50 Purchase Cost $20,000 $20,000 Sales Proceeds $19,000 $9,000 Loss ($1,000) ($11,000) Percentage Loss (5%) (55%) Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. Purchasing 100,000 AMPWME call Warrants for 20c and selling for 9c 2. Reducing your dollar exposure to shares Call Warrants can also be used to reduce your maximum dollar exposure to a stock by making a smaller capital investment. Johan has $20,000 to trade and is particularly bullish on the AMP share price in the short term. AMP is currently trading at $10.00 per share and believes the share price is going to appreciate to $11.00 in the near term. Instead of purchasing $20,000 worth of AMP shares (2000 shares), Johan decides to purchase $1,250 of AMPWME call Warrants that are trading at 20c. This means that the remaining $18,750 is available for other investments. This is what many traders call spreading their risks. Warrant Code AMPWME Exercise (Strike) Price $10.00 Expiry Date 29 March 2007 Conversion Ratio 3:1 Delta 18% Daily Time Decay (Theta) $0.002 Purchase Date 10 January 2007 Warrant Type Call Current AMP share price $10.00 Warrant Price $0.20 Amount Invested $1,250 No. Warrants Purchased 6,250 21

22 The table below shows that if the share price of AMP appreciates from $10.00 to $11.00, as Johan expected, the profi t from trading the call Warrant is similar to the profi t from trading the shares. However, the initial capital outlay required for that return was substantially less. Purchasing 2,000 AMP shares for $10.00 and selling for $11.00 Purchase Cost $20,000 $1,250 Sales Proceeds $21,000 $2,250 Profit $1,000 $1,000 Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. Purchasing 6,250 AMPWME call Warrants for 20c and selling for 36c Investing less capital also means Johan s exposure to any losses have been reduced. By trading the call Warrant, if AMP shares were to experience a signifi cant fall, Johan reduces his losses to a maximum of $1,250, whereas his maximum possible loss trading the underlying shares is $20,000. Purchasing 2,000 AMP shares for $10.00 and selling for $2.00 Purchase Cost $20,000 $1,250 Sales Proceeds $4,000 $0 Loss ($16,000) ($1,250) Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. Purchasing 6,250 AMPWME call Warrants for 20c and selling for 0c As referred to above the potential for greater profi ts carries the risk of greater potential losses. Please be aware that AMP may not need to fall as much for there to be a complete loss of capital invested in Warrants as is required for there to be a complete loss of capital invested in the shares. 22

23 Put Warrants 1. Increase profits from falling share prices Put Warrants can be used to dramatically increase profi ts when a share price falls. Consider the following scenario. Michelle has $20,000 to invest and has developed a bearish view on oil, and therefore the WPL share price in the short term. WPL is currently trading at $40.00 and Michelle believes the share price is going to fall to $35.00 in the near term. Instead of short selling $20,000 of WPL shares, Michelle decides to purchase $20,000 of WPL put Warrants that are trading at $1.00. (Note- short selling involves selling shares that you don t own. This is a complex process that is high risk as it can give rise to unlimited losses.) Warrant Code WPLWMV Exercise (Strike) Price $44.00 Expiry Date 22 February 2007 Conversion Ratio 5:1 Delta -16% Daily Time Decay (Theta) $0.004 Purchase Date 10 January 2007 Warrant Type Put Current WPL share price $40.00 Warrant Price $1.00 Amount Invested $20,000 No. Warrants Purchased 20,000 If the WPL share price falls from $40.00 to $35.00, the profi t from trading the put Warrant is signifi cantly greater than the profi t from short selling the shares. Additionally, the potential for unlimited losses is also removed. By trading the put Warrant Michelle is exposed to a maximum loss of $20,000, as the maximum loss that can be incurred trading a put Warrant is limited to the amount you invested. 23

24 Selling 500 WPL shares for $40.00 and buying them back for $35.00 Purchase Cost $17,500 $20,000 Sales Proceeds $20,000 $35,200 Profi t $2,500 $15,200 Percentage Profit 12.5% 76% Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. Purchasing 20,000 WPLWMV put Warrants for $1.00 and selling for $1.76 However, if the WPL price instead rises, the put Warrant will decrease in value. This is because the put Warrant will move in the opposite direction to the WPL share price. If, instead of falling as Michelle had predicted, the WPL price increases from $40.00 to $43.00, WPL put Warrants will fall from $1.00 to 52c. This is illustrated below. Selling 500 WPL shares for $40.00 and buying them back for $43.00 Purchase Cost ($21,500) $20,000 Sales Proceeds $20,000 $10,400 Loss ($1,500) ($9,600) Percentage Loss (7%) (48%) Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. Purchasing 20,000 WPLWMV put Warrants for $1.00 and selling for $0.52c 24

25 Index Warrants and Index Turbo Warrants 1. Increase profits in a rising market Index Warrants can be used to dramatically increase potential percentage profi ts when the market, and specifi cally the S&P/ASX200 index, rallies. Consider the following scenario. James has a bullish view of the market, and has $20,000 to invest. He wants to create a diversifi ed portfolio but is unsure which shares will deliver the best gains. James decides to invest in index Warrants in order to achieve a broad and leveraged exposure to the market. He decides to invest into the XJOWMC S&P/ASX200 index call Warrant with the following details: Warrant Code XJOWMC Exercise Level 5450 Expiry Date 14 March 2007 Conversion Ratio Delta 0.28% Daily Time Decay (Theta) $0.006 Warrant Type Call Current Index Level 5500 Warrant Price $0.80 Amount Invested $20,000 No. Warrants Purchased 25,000 If at expiry the S&P/ASX200 index level gains from 5500 to 5700 (+3.64%), the profi t from trading the index call Warrant is signifi cantly greater (+83.75%) than the % move of the actual index. Purchase Cost $20,000 Sales Proceeds $36,750 Profi t / (Loss) $16,750 Percentage Profit 83.75% Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. Purchasing XJOWMC index call Warrants for 80c and selling for $1.47 You should make sure you are familiar with the risks, and the effect leverage may have on your investment. 25

26 2. Using Index Turbo Warrants to boost profits in a rising market James wants to purchase an index Warrant with higher delta than the regular index Warrants he bought previously, in order to achieve even greater exposure to movements in the index. He therefore purchases an index turbo Warrant. Index turbo Warrants generally have higher deltas, and lower time decay than ordinary index Warrants. However, it is vitally important that you are aware of the Warrant s knock out level. When the SPI 200 futures contract trades at the index Warrant s knock out level (in most cases, the index Warrant s exercise price) then the Warrant will terminate and you will lose the money you have invested. James decides that he is prepared to take on the extra risk associated with the index turbo Warrant, and purchases the XJOXME index turbo call Warrant. This has an exercise price and knockout level of James feels that the current level of the SPI 200 futures contract index of 5500 is suffi ciently far enough away from the knock out level, so he feels comfortable buying the turbo Warrant. Details are below. Warrant Code XJOXME Exercise Level 5375 Expiry Date 14 March 2007 Conversion Ratio Delta 0.495% Daily Time Decay (Theta) $0.003 Warrant Type Call Current Index Level 5500 Warrant Price $0.80 Amount Invested $20,000 No. Warrants Purchased 25,000 If at expiry the S&P/ASX200 index level gains from 5500 to 5700 (+3.64%), the profi t from trading the index call Warrant (+120%) is signifi cantly greater than the % move of the actual index. Purchasing XJOWMC index call Warrants for 80c and selling for $1.47 Purchase Cost $20,000 Sales Proceeds $44,000 Profi t $24,000 Percentage Profit 120% Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. 26 You should make sure you are familiar with the risks of your investment, and the effect leverage may have on your investment.

27 3. Offset losses on your portfolio when the market falls * Tim owns a portfolio of shares. Even though he has a long-term bullish view on the market and his portfolio, he is concerned that over the coming weeks the market is going to experience a fall. To mitigate potential losses in his portfolio if this occurs, he decides to invest $20,000 in index put Warrants. He purchases the XJOWMR S&P/ASX200 index put Warrant with the following details: Warrant Code XJOWMR Exercise Level 5600 Expiry Date 14 March 2007 Conversion Ratio Delta (0.30%) Daily Time Decay (Theta) $ Warrant Type Put Current Index Level 5500 Warrant Price $1.00 Amount Invested $20,000 No. Warrants Purchased 20,000 If, at expiry, the S&P/ASX200 index level falls from 5500 to 5300 (-3.64%), the profi t from trading the index put Warrant will offset the falls Tim s portfolio will experience, as he will have made a 54% profi t on his index Warrant. Purchase Cost $20,000 Sales Proceeds $30,800 Profi t / (Loss) $10,800 Percentage Profit 54% Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. Purchasing XJOWMR index call Warrants for $1.00 and selling for $1.54 * Assumes the portfolio contains the same shares in the same weightings as the S&P/ASX 200 index. 27

28 4. Offset portfolio losses using index turbo puts when the market falls Tim wants to achieve larger exposure to movements in the level of the index in his Warrant than the regular index put Warrant he purchased previously. Therefore, he decides to purchase an index turbo Warrant which has a higher delta. Although it has much higher risk than ordinary index Warrants, it will provide a higher delta, therefore providing even greater percentage movements in his Warrant relative to movements in the underlying index. It also has less time decay. Tim purchases the XJOXMV index turbo call Warrant. This has an exercise price and knockout level of Tim feels that the current level of the SPI 200 Futures Contract index of 5500 is suffi ciently far enough away from the knock out level, so he feels comfortable buying the turbo Warrant. Details are below. Warrant Code XJOXMV Exercise Level 5600 Expiry Date 14 March 2007 Conversion Ratio Delta (0.495%) Daily Time Decay (Theta) $ Warrant Type Put Current Index Level 5500 Warrant Price $ Amount Invested $20,000 No. Warrants Purchased 29,274 If at expiry the S&P/ASX200 index level falls from 5500 to 5300 (-3.64%), the profi t from trading the index turbo put Warrant will offset the falls in Tim s portfolio, and will generate a greater profi t from that of the ordinary index Warrant (145.3% gain vs 54% in the previous example). Purchase Cost $20,000 Sales Proceeds $49, Profi t / (Loss) $29, Percentage Profit 145.3% Purchasing XJOXMV index turbo put Warrants for $ and selling for $ Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially.

29 Instalments 29

30 Instalments give you leveraged exposure to the market by allowing you to part pay for shares. When you buy an Instalment, you make an initial payment which is a fraction of the share price, and gain exposure to many of the benefi ts of share ownership as if you ve paid for the share in full. In contrast to trading Warrants, Instalments provide you with the benefi ts of dividends and franking credits*. With Instalments you spend less upfront, and therefore enjoy greater share exposure, potential dividend income and franking credits, all of which can help you to accelerate your wealth and reach your investment objectives sooner. Instalments incorporate a packaged loan for shares. This loan amount is non recourse in nature, which means that the Instalment holder has no obligation to repay the loan, and if the underlying share price falls, will not be subject to margin calls. For the majority of Instalment types, this loan amount can be repaid at any time until the Instalment matures. There are a range of different Instalments available, from short term trading Instalments, to longer dated, more conservative Instalments such as Self Funding Instalments (SFIs) and Managed Fund Instalments (MFIs). To accommodate differing risk preferences, the levels of borrowing or gearing that Instalments offer vary from 40% up to 100%. Did you know? Some of Australia s largest privatisations such as Commonwealth Bank and Telstra, including the recently listed Telstra 3 receipts, were listed using similar Instalment structures. Did you know? More than $5.1 billion worth of Instalments, representing almost 1.6 billion Instalments, were traded on the ASX, last year in *Subject to eligibility

31 Types of Instalments There are fi ve main types of Instalments. Trading Instalments Trading Instalments are commonly used to trade short term price movements in shares, as well as enhance short term dividend yields. For traders with a positive view on a share, trading Instalments offer the potential for increased returns on more than 150 leading Australian shares. Gearing levels vary from 40% - 100%, and maturities range from one month to up to two years. All trading Instalments offer the benefi ts of dividends and franking credits*. Resetting Instalments Commonly used by investors wanting to gear into shares for longer periods of time, resetting Instalments offer investment periods up to 10 years. Gearing is offered between 40-95% and is reset annually to within a predefi ned range. Regular Resetting Instalments will have their gearing levels reset to within 40-70% whilst the loan amount of Hot Resetting Instalments is reset to within 70-95%. All resetting Instalments offer the benefi ts of dividends and franking credits*. Self Funding Instalments (SFIs) Designed for investors who want low maintenance, longer term gearing into shares, SFI s offer a solution for up to ten years. Dividends are used to reduce the loan amount and annual interest is added onto the loan amount, ensuring that no additional cash payments are made to service the loan over the investment**. Even though all dividends are used to pay off the loan amount, holders are still entitled to any available franking credits*. Income Instalments A recent Instalment innovation, Income Instalments combine many of the features of regular Instalments with that of Self Funding Instalments (SFIs). Holders gain leveraged exposure to a wide range of shares and receive all ordinary dividends in cash, as well as any available franking credits*. When future interest payments are due on the loan, an additional 12 months of prepaid interest is automatically added to the loan amount, instead of requiring you to outlay cash**. *Subject to investor eligibility **Subject to provision of TFN, ABN or relevant exemption 31

32 Managed Fund Instalments (MFIs) Designed for investors wishing to gear into a range of managed funds without some of the risks of traditional forms of gearing, such as margin calls. Similar to the SFI structure, distributions are used to reduce the loan amount and annual interest is added onto the loan amount, ensuring that no additional cash payments are made to service the loan over the investment**. Holders will receive any available franking credits on these distributions*. MFIs are not listed on the ASX. For the purposes of this Trading Guide, the primary focus will be on Trading Instalments, as these Instalment instruments are the most widely used by traders. Why Use Instalments? Reasons to invest include leverage, diversifi cation, generating dividend income and extracting cash. ASX listed Instalments are also one of the few leveraged investments allowable for Self Managed Super Funds (SMSFs). Leverage A popular wealth creation strategy for many investors over the years is to use gearing in their share portfolios. By borrowing to invest in shares, you may be able to invest in a wider range of shares, and hence potentially grow your wealth faster. You can gain more share exposure, diversify further, access a greater number of dividends and enhance your exposure to franking credits*. Instalments offer leverage to shares ranging from 40% to 100%. Diversification Instalments allow you to diversify and build a broader asset base within your portfolio. This is because gaining exposure to each share costs less up front, leaving funds left over to invest elsewhere. Generating income Instalments may enable you to derive a regular income stream through their entitlement to dividends and franking credits paid*. Writing call options over Instalments can also be another source of income for your portfolio. You should familiarise yourself with the risks of leveraged investments prior to making any investment decision. 32 *Subject to investor eligibility

33 Did you know? Instalments can be lodged as collateral with the Australian Clearing House (ACH) so you can write options against them. Unlock wealth from existing share holdings As an alternative to selling shares to release cash, you can convert your shares into Instalments without triggering a Capital Gains Tax (CGT) event relating to those shares (not available for SMSFs). This strategy is known as Cash Extraction, and can be an ideal way to diversify your portfolio by investing the released cash elsewhere, while maintaining exposure to your existing shares. Gearing for SMSFs ASX listed Instalments are one of the very few ways that Self Managed Super Funds can gear into shares, without breaching APRA guidelines. They are an attractive investment proposition for SMSFs as they can enable the fund to Leverage into growth investments such as shares Earn more dividend income, as you are entitled to the benefi ts of dividends and franking credits Use any excess franking credits to offset other taxable income Proposed changes to the law may affect whether Instalments are an eligible investment for Self Managed Super Funds, particularly Managed Fund Instalments. You should refer to the PDS for the Instalments in which you want to invest for more information and seek your own advice as to whether Instalments are an eligible investment for your SMSF. No Margin Calls One of the biggest concerns with more traditional forms of gearing is the risk of margin calls. However with Instalments, if the underlying share price falls, you have no obligation to make any margin payments. Limited Downside With Instalments, the loan against the shares is non-recourse in nature. This means that you have no obligation to repay the loan or make the completion payment. Even if the underlying share price collapses completely, you can walk away with no further obligations. 33

34 Key Terms Loan Amount: The amount borrowed which the Instalment holder will need to repay in order to receive full ownership of the underlying shares. The repayment of the loan amount is optional. Holders of Income Instalments are only entitled to make this payment on the maturity date to receive the shares. For all other Instalment types, Holders may pay off the loan amount at any time up until expiry and be entitled to receive the underlying shares. Maturity Date: This is the date that the Instalment expires. You may be able to buy and sell Instalments up until 4pm on the maturity date. If you are still holding your Instalment after this time and have not given a completion notice or HPO exercise notice, you will be entitled to an assessed value payment. Reset Date: Resetting Instalments have an annual reset date. On this date the loan amount may be adjusted to bring the gearing of the Instalments to within a predetermined percentage. On this date, interest, holder s put option cost and borrowing fees will also need to be prepaid for a further 12 months. Exercise Style: An American style Instalment can be exercised at any time up to and including the maturity or reset date. A European style Instalment can be exercised only on the maturity date. The majority of Instalment types are American style with Income Instalments being the only type that is European. Underlying Asset: This is the asset that the Instalment gives you exposure to. Instalments are offered over Australian shares and in the case of MFI s, managed funds. 34 *Subject to investor eligibility **Subject to provision of TFN, ABN or relevant exemption

35 Instalment Pricing The price of an Instalment is made up of four components. Capital component: equal to the share price less the loan amount. Prepaid interest: the interest on the Loan Amount until the next reset, annual interest date, interest drawdown date or maturity date. This may be deductible against an investor s income. Holders put option cost: otherwise known as protection or insurance, it is this cost which enables the investor to walk away from making the fi nal payment if the share price falls below the loan amount. Borrowing fee: the fee payable to the issuer to acquire the loan. Factors Affecting Price Movements The price of an Instalment has a direct relationship with the price of the underlying share. As the price of the underlying share moves up or down, the price of the Instalment will move in the same direction. The Instalment price will also be affected by a number of other factors. These include: Dividends An Instalment will go ex-dividend when the underlying share does. This means that the price of the Instalment (other than a Self Funding Instalment or Managed Fund Instalment) will fall by the amount of the dividend paid on the date it goes ex-dividend (other things being equal). For an SFI or MFI, dividends are used to reduce the loan amount, so the price should not change on the ex-date. Changes to forecast dividends may also affect the price of an Instalment by increasing or decreasing the price of put protection. Generally an increase in future expected dividends will increase the put protection cost and overall Instalment price. Decay of Time Value The time value of an Instalment is made up of the interest and put protection components. Over the life of the Instalment, the value of each component will gradually decline until it reaches zero at the reset or maturity date. Given the loan amount of a Hot Instalment is greater than that of a Regular Instalment, interest and put costs will be more expensive, and thus decay at a faster rate than for Regular Instalments. 35

36 Interest Rates All other things being equal, when interest rates increase, so does the prepaid interest component, making the Instalment price rise. Conversely, when interest rates fall so will the value of the Instalment. Volatility The higher the volatility of the underlying share, generally the higher the put cost/ protection cost, and therefore the higher the price of the Instalment. Delta The delta of an Instalment is the change in the value of the Instalment relative to movements in the underlying share price, and is represented by a percentage of 0% to 100%. Example If an Instalment has a delta of 90% and the underlying share price increases by 10c, the Instalment should increase by 9c (10c x 90%). An Instalment that is out of the money will generally have a delta less than 50%. The further out of the money the Instalment is, the lower the delta will be. An Instalment that is deeply out of the money will have a delta closer to 0% while an Instalment that is at the money will generally have a delta of 50%. An Instalment that is in of the money will generally have a delta greater than 50%. The deeper in the money the Instalment is, the higher the delta will be and the more the Instalment will move in relation to the share price. An Instalment that is deep in the money will have a delta close to 100%. Delta is not a constant. Delta will change over time as the relationship between the loan amount and the underlying share price changes. Thus, a movement in the underlying share price will cause a change in the delta of an Instalment. Trading Tip An Instalment will decay on every day through its life whether the market is open or not. Hence an Instalment will decay on days when the market is closed. 36

37 Strategies and Case Studies Instalments 1. Trade short term price rises Simon has $50,000, and wants to trade short term price movements in the NAB share price. He believes NAB shares have recently been oversold, and expects them to recover signifi cantly in the near term. Instead of purchasing $50,000 of NAB shares, Simon decides to purchase $50,000 of NAB Instalments. At the time of purchase, NAB shares were trading at $ Instalment Code NABIMT Exercise (Strike) Price $23.50 Maturity Date 29 March 2007 Delta 95% Daily Time Decay (Theta) $0.013 Purchase Date 12 January 2007 Current NAB share price $39.00 Instalment Price $4.03 Amount Invested $50,000 No. Instalments Purchased 12,407 On 22 January 2007, after holding the NAB Instalment for 10 days, the NAB share price has risen to $41. The percentage gains made from the Instalment investment versus investing directly in NAB shares can be seen below: Purchasing 1,282 NAB shares for $39 and selling for $41 Purchase Cost $50,000 $50,000 Sales Proceeds $52,562 $70, Profi t $2,562 $20, Percentage Profit 5.1% 40.6% Purchasing 12,407 NAB Instalments for $4.03 and selling for $5.67 Illustrative fi gures only. Actual fi gures which apply to your investment may differ materially. 37

38 As indicated, if the share price of NAB appreciates from $39 to $41, Simon s profi t from trading the NAB Instalment (40.6%) is signifi cantly greater than the profi t from trading shares (5.1%). However, the potential for greater profi ts carries the risk of potentially greater losses. Instead of increasing, if the share price of NAB falls from $39 to $37 over this period, the percentage losses are far greater by buying the Instalment compared to buying the NAB shares. See below. Purchasing 1,282 NAB shares for $39 and selling for $41 Purchase Cost $50,000 $50,000 Sales Proceeds $47,434 $29, Loss ($2,566.00) ($20,471.34) Percentage Loss (5.1%) (40.9%) Purchasing 12,407 NAB Instalments for $4.03 and selling for $2.38 NB - Time decay is taken into account in the above examples. Time decay is calculated as no. days held (10 days) x daily time decay ($0.013) = $0.13. The above examples are illustrative only. 2. Increase dividend yield Otherwise known as the Dividend Yield Play, this is a very popular strategy with traders who like to capture dividends and franking credits through trading stocks that are approaching their ex-dividend dates. The basic principle of this strategy is to buy an Instalment over a stock before its ex-dividend date, hold the Instalment for at least 47 days (under the 45 Day rule # ), and then sell it after the stock goes ex-dividend. The objective is to pick up the dividend, any franking credits attached to the dividend and a potential capital gain at the same time. Tips for a Successful Strategy 1. Choose an Instalment which suits your view; 2. Calculate the break-even share price for your strategy; 3. Remember the 45 day rule # ; and 4. The ex-date is not the pay date. 38 # The rule requires resident taxpayers to hold shares for at least 45 days (excluding the days of purchase and sale) to be eligible to receive franking benefi ts from dividends paid on shares. Furthermore, even if the shares were held for at least 45 days, the franking credit is denied if the resident taxpayer has eliminated 70 per cent or more of the ownership risk through other fi nancial transactions during that period. Hence, the rule also specifi es a 30 per cent minimum level of ownership risk. There are several exceptions to the 45-day rule. One of these is the small shareholder exemption which exempts shareholders from applying the 45-day rule by electing to limit the amount of total franking rebates to which they are entitled. The exemption applies to all individual taxpayers with a total franking rebate entitlement of $5000 or less.

39 Jenny wants to use this strategy to trade the four major bank stocks. She knows that CBA has a different dividend cycle to the other three banks, with CBA usually going ex-dividend in February and August, and NAB, WBC and ANZ all generally going ex-dividend in May and November. Jenny trades CBA Instalments in the lead up to the CBA ex-dividend date. After CBA has gone ex-dividend, Jenny sells out of her position, and buys ANZ, WBC or NAB Instalments in the lead up to their ex-dividend dates. She uses this trading strategy to potentially capture at least four dividends and associated franking credit entitlements a year. Jenny decides to take a moderately geared approach to her trading strategy and purchases a CBA Instalment that is approximately 50% geared. She knows that by doing so, she will be subject to less time decay and will have a higher delta^ than a more highly geared Instalment, despite the fact that she will have to invest a larger amount of her own capital upfront. Instalment Code CBAIMF Exercise (Strike) Price $27.00 Reset Date 17 November 2007 Delta^ 100% Daily Time Decay (Theta)^ $0.007 Purchase Date 12 January 2007 Sale Date 1 March 2007 Current CBA share price $50.00 Instalment Price $25.00 Amount Invested $50,000 No. Instalments Purchased 2,000 Illustrative fi gures only. Actual prices, costs and dividends may differ materially. ^ Theta and Delta are measures of risk. Please speak to your fi nancial adviser if you need more information. 39

40 On 2 February 2007, CBA shares go ex-dividend $1.03, with 100% franking attached. On 1 March, Jenny has been holding the Instalment for 48 days, and is therefore also entitled to the 100% franking credits. The comparative dividend yields and franking credits made from her Instalment investment versus investing directly in CBA shares can be seen below: Purchasing 1,000 CBA shares for $50 and receiving the $1.03 Fully Franked Dividend Purchase Cost $50,000 $50,000 Dividends Paid $1,030 $2,060 Dividends Yield 2.06% 4.12% Franking Credits $ $ Gross Dividend $1, $2, Gross Dividend Yield 2.94% 5.89% Illustrative fi gures only. Actual prices, costs and dividends may differ materially. Purchasing 2,000 CBAIMF Instalments for $25 and receiving the $1.03 Fully Franked Dividend As indicated, the potential dividends and franking credits are signifi cantly greater from trading the CBA Instalment than from trading CBA shares. Alternatively, Jenny may choose to take a more aggressive approach to trading, and elects to purchase a more highly geared CBA Instalment, with a gearing level of approximately 95%. She knows that by doing this, she will be exposed to greater risks through, among other things, greater amounts of time decay, and lower delta. However, after reading the PDS for the Instalments she plans to invest in, she is comfortable with the risks of additional leverage, and she believes the greater exposure she will obtain through the lower upfront Instalment price will benefi t her and provide greater returns. 40

41 Instalment Code CBAIM2 Exercise (Strike) Price $49.00 Maturity Date 26 April 2007 Delta^ 58% Daily Time Decay (Theta)^ $0.019 Purchase Date 12 January 2007 Sale Date 1 March 2007 Current CBA share price $50.00 Instalment Price $4.00 Amount Invested $50,000 No. Instalments Purchased 12,500 Illustrative fi gures only. Actual prices, costs and dividends may differ materially. On 2 February 2007, CBA shares go ex-dividend $1.03, with 100% franking attached. A comparison of the gross dividend yields gained from Jenny s Instalment investments versus investing directly in CBA shares can be seen below. As this illustrates, the additional leverage gained from the CBA highly geared Instalment has enabled Jenny to increase her exposure to CBA and thus, in this case, increase her gross dividend yield. CBA SHARES Purchasing 1,000 CBA shares for $50 and receiving the $1.03 Fully Franked Dividend CBA MODERATELY GEARED INSTALMENTS Purchasing 2,000 CBAIMF Instalments for $25.00 and receiving the $1.03 Fully Franked Dividend CBA HIGHLY GEARED INSTALMENTS Purchasing 12,500 CBAIM2 Instalments for $4.00 and receiving the $1.03 Fully Franked Dividend Purchase Cost $50,000 $50,000 $50,000 Dividends Paid $1,030 $2,060 $12, Dividends Yield 2.1% 4.1% 25.8% Franking Credits $ $ $5, Gross Dividend Yield $1, $2, $18, Gross Dividend Yield 2.9% 5.9% 36.8% Illustrative fi gures only. Actual prices, costs and dividends may differ materially. 41

42 Ready to Start Trading? Determine your Investment Objectives Prior to trading Instalments or Warrants, you must fi rst consider your objectives, including goals; the time frame for achieving your goals; and how much risk you re prepared to take. Understand the Product It is necessary to understand all the benefi ts and risks associated with each product. Take your time before investing, making sure you do plenty of research about the products before you start. Make sure you read and understand the Product Disclosure Statement (and any relevant Supplementary Product Disclosure Statement) for the Warrants you want to invest in prior to investing. Choosing the Right Warrant to Trade There are a wide variety of trading Warrants and Instalments to choose from. What you trade should depend on which product best matches your risk and return profi le and your view on the underlying security. When choosing or comparing the price of different trading Warrants and Instalments make sure you consider variables such as the conversion ratio, exercise style and implied volatility of the Warrant, all of which will affect the price of a Warrant. Also be on the lookout for any barriers (knock-out features) in the particular Warrant structure. Barriers (knock-out features) will affect the pricing of a trading Warrant and may trigger a loss of your investment if breached. 42

43 Subscribe to our Free Newsletters Our free daily and weekly newsletters provide you with current market information, trading tips and detailed strategies for Warrants and Instalments. To subscribe, visit Use the Tools and Calculators Our calculators and pricing tools allow you to view the terms and sensitivities of all Warrants listed on the ASX, calculate a theoretical price and delta for a particular Warrant, and compare all the available Warrants for a particular share. You can fi nd the calculators at

44 Ready to Start Trading? Contact your adviser or Ask Macquarie BKL /07