Introduction to Macquarie MINIs

Transcription

1 Macquarie MINIS Introduction to Macquarie MINIs MINIs are a type of warrant which are listed on the Australian Securities Exchange and give investors leveraged exposure to a range of assets. MINIs are primarily aimed at investors who want a transparent leveraged instrument, that offers the flexibility to trade both long and short and have a built in stop loss feature. What are the main features of Macquarie MINIs? Leverage MINIs provide exposure to the returns of the underlying asset for a portion of the underlying asset cost. The Strike Price of a Macquarie MINI relative to the price of the underlying asset represents the amount of leverage incorporated into a Macquarie MINI. The closer the price of the underlying asset is to the Strike Price, the greater the amount of leverage. Trade in rising and falling markets Investors can trade in both long and short positions which make them useful for a range of strategies. Buying a MINI Long enables investors to benefit when the underlying asset is rising, and Buying a MINI Short enables investors to benefit when the underlying asset is falling. Example Share MINI Long If the current CBA share price is $50 and the Macquarie MINI Strike Price is $40 the leverage on this MINI is the Strike Price divided by the current CBA share price. = (40/50) * 100 = 80% Underlying assets MINIs are issued over shares, indices, exchange traded funds, currencies and commodities. Delta 1 The value of a MINI generally moves cent for cent with the value of the underlying asset^. No expiry date MINIs have no expiry date. This offers investors the flexibility to trade intra-day, or hold for as long as the investor wishes to maintain their exposure. Note that MINIs may be terminated if they are exercised by you or if a Stop Loss Event, Extraordinary Event or Issuer Call Event occurs. Movement in Underlying Value of MINI MINI Long MINI Short Stop loss MINIs have an embedded stop loss feature (so you can never lose more than your initial investment) and there are no margin calls. Note that if a Stop Loss Event occurs, the MINI will be terminated. ASX listed MINIs, like other trading warrants are listed and traded on the ASX. Unlike over the counter (OTC) products MINIs are supervised and monitored by the ASX. This means that MINIs can be traded through an existing online brokerage account or advisor. A warrant client agreement form is required to be lodged with your broker before you can trade. ^ Receive a one for one return plus or minus any adjustment to the strike price for dividends and interest, and taking into account any spread on the MINI Price that may impact the return. If an investor chooses to exercise a Macquarie MINI or a Macquarie MINI is terminated early in accordance with the Terms and Conditions any return may be reduced by an amount for Expenses.

2 How is a MINI valued? MINIs don t have complicated options pricing and have grown in popularity because of their efficient and transparent structure. The value of a Macquarie MINI is transparent and straightforward to calculate. Value of a MINI Long = (Reference Asset Value Strike Price) / Conversion Factor Value of a MINI Short = (Strike Price Reference Asset Value) / Conversion Factor For example, if the current CBA share price is $50 and the Macquarie MINI Strike Price is $40 the value of the Macquarie MINI is: ($50 - $40)/1 = $10 Investors do not need to perform this calculation. This information can be found on a pricing sheet which is published daily. The Strike Price reflects the amount of leverage and is adjusted daily for interest costs. The Strike Price is also adjusted for any dividends paid on the underlying asset and other corporate actions. How are funding costs calculated? MINIs are a leveraged investment, and as such attract interest costs on the leverage component of the MINI. This interest cost, known as the Daily Funding Cost, is not directly payable by the investor but instead will be reflected in the value of the purchased Macquarie MINI. Daily Funding Costs will accrue on a daily basis, at the end of each day. Funding costs per day = (Interest rate per annum x Strike Price)/365 days If you hold a MINI position overnight the Strike Price will be adjusted by the cost of funding that position. A funding cost is only incurred if a MINI is held overnight. Example Assumptions BHP share price is $45 and does not change Day 1 BHP MINI Long Strike Price = $36 Interest rate 10% Value of MINI Long: = ($ $36.00)/1 = $9.00 BHP MINI Short Strike Price = $54 Interest rate 1% Value of MINI Short: = ($ $45.00)/1 = $9.00 Funding cost per day is = (10% x $36.00)/365 = $ Funding cost per day is = (1% x $54.00)/365 = $ Day 2 Strike price: = $ $ = $ Value of MINI Long: = ($ $ )/1 = $ Strike Price: = ($ $ = $ Value of MINI Short: = ($ $45.00)/1 = $ In this example, holders of share MINI longs will pay the funding cost while holders of share MINI shorts will receive a funding benefit. Note that in a low interest rate environment holders of MINI shorts may pay a funding cost. Interest rates vary depending on the underlying asset and whether you hold a MINI Long or a MINI Short and can be found on the pricing sheet which is published daily.

3 How are dividends treated? The holder of the MINI does not receive dividends paid on the underlying security. However, on the day that the underlying security trades ex-dividend, the Strike Price and the Stop Loss Level will be decreased by the amount of the dividend for both MINI Longs and MINI Shorts. This adjustment offsets the theoretical fall in the share price that takes place on the ex-dividend date. Example - Share MINI Long An investor holds a MINI Long over RIO with a Strike Price of $64.00, Stop Loss Level of $70.40 and Conversion Factor of 1. Note: On the Ex-Date, RIO s stock price is expected to fall (all things being equal) by the dividend amount. The effect of this is that the MINI value is preserved over the ex-date. Cum-Dividend Ex-Dividend Actual Dividend amount - $ 0.50 If Rio moves by more or less than the Dividend Amount, the MINI value will not remain at $ Reference Asset Value $80.00 $80.00 $0.50 = $79.50 Strike Price $64.00 $64.00 $0.50 = $63.50 Stop Loss Level $70.40 $70.40 $0.50 = $69.90 MINI Value $16.00 ($ $64.00)/1 $16.00 ($79.50 $63.50)/1 Example - Share MINI Short An investor holds a MINI Short over RIO with a Strike Price of $96.00, Stop Loss Level of $86.40 and Conversion Factor of 1. Cum-Dividend Ex-Dividend If Rio moves by more or less than the Dividend Amount, the MINI value will not remain at $16.00 Actual Dividend amount - $0.50 Reference Asset Value $80.00 $80.00 $0.50 = $79.50 Strike Price $96.00 $96.00 $0.50 = $95.50 Stop Loss Level $86.40 $86.40 $0.50 = $85.90 MINI Value $16.00 ($ $80.00)/1 $16.00 ($95.50 $79.50)/1

4 How does the stop loss feature work? MINIs have an in-built stop loss feature to ensure that the investor is not exposed to margin calls and cannot lose more than their initial outlay. Stop Loss Levels are set when the MINI is issued and is set: above the Strike Price and below the current value of the underlying asset for MINI Longs; and below the Strike Price and above the current value of the underlying asset for MINI Shorts. The Stop Loss Level will typically be set between 5% and 30% below the Strike Price for MINI Shorts and between 5% and 30% above the Strike Price for MINI Longs. Thereafter, the Stop Loss Level is adjusted or reset on the first trading day of each month by Macquarie to take into account movements in the underlying asset. Note that Macquarie may also adjust the Stop Loss Level of the MINI during the course of the month to take into account potential adjustment events such as dividends and corporate actions or for any other reason. Please refer to the Product Disclosure Statement (PDS) for more information. Factors that may influence where the Stop Loss Level is set include: the difference between the MINI Strike Price and the price of the underlying asset; the historical or anticipated volatility of the underlying asset; and the historical or anticipated liquidity of the underlying asset. What happens if the stop loss level is triggered? If the underlying asset at any time trades at or below the Stop Loss Level for a MINI Long; or at or above the Stop Loss Level for a MINI Short, then trading in the MINI series is halted and Macquarie will close out the underlying hedge position. In the case of MINI longs, Macquarie will sell the underlying security; in the case of a MINI short, Macquarie will buy back the underlying security. Macquarie will then declare the Stop Loss Value. The Stop Loss Value will be the intrinsic value of the MINI determined by Macquarie using a price for the reference asset which is generally based on the average price Macquarie can achieve (the Macquarie Close Out Price) when closing out its hedge positions. The Stop Loss Value cannot be negative if the Macquarie Close Out Price is below the Strike Price for a MINI long, or above the Strike Price for a MINI short, the remaining value is zero and the investor receives no payment. The Stop Loss Level ensures that you will never lose more than your initial investment. It also means that you will never have to make additional payments to Macquarie. Trading in the MINI series resumes at 2pm AEST the trading day following the Stop Loss Event and investors may sell their MINIs back to Macquarie for the remaining Stop Loss Value. Macquarie will continue to buy back MINI positions from investors until 4pm the day after trading in the MINI resumes after which the MINI ceases trading. If the investor does not sell their MINIs back during this period, Macquarie transfers the Stop Loss Value to the holder 10 business days from the Stop Loss Event occurring. Note that if the Stop Loss Value is zero the investor receives no payment. An announcement is made to the ASX on the occurrence of a Stop Loss Event. An additional announcement is made once the Stop Loss Value is determined. Both announcements can be accessed on the ASX and Issuers website and also under their issuer code on trading platforms (e.g. Macquarie MQG.ASX)

5 Example An investor holds a WBC MINI Long with a Strike Price of $18, Stop Loss Level of $ WBC is trading at $22.50, so the MINI value = ($ $18.00)/1 = $4.50. During the morning the WBC share price drops below $19.80, the Stop Loss Level. The following table illustrates the Stop Loss Event. Day Day 1 (Day of Stop Loss Event) Day 1 (Day of Stop Loss Event) Action Trading in WBC MINI Long is halted Stop Loss Event announcement made to ASX Macquarie unwinds its hedge by selling WBC shares The average sale price achieved (Close Out Price) is $19.40 Day 2 Stop Loss Value announcement made to ASX Stop Loss Value = (Close Out Price Strike Price on the Stop Loss Event Date) / Conversion Factor = ($19.40 $18.00)/1 = $1.40 Day 2 At 2pm trading in WBC MINI Longs recommences and investors can sell their MINIs back to Macquarie at the Stop Loss Value (1.40) Day 2 The investor sells their WBC MINI Long back to issuer on-market at $1.40 Day 3 At market close, the WBC MINI ceases trading and is terminated If the investor did not sell their MINI back to Macquarie on-market, they are entitled to receive the Stop Loss Value in cash within 10 business days of the Stop Loss Event occurring (i.e. Day 1 above) Where the average hedge close out price is below the Strike Price of the underlying asset the Stop Loss Value will be $0 and the investor receives no payment. The Stop Loss Level is not a guaranteed stop loss. The investor is exposed to the risk that Macquarie will not be able to close out the hedge at the Stop Loss Level. However, this risk is capped and Macquarie bears the risk below (or above, in the case of a MINI short) the Strike Price. Example Strike Price Stop Loss Level WBC shares hedge sale Stop Loss Value $20.00 $2.00 $18.00 $19.80 $19.40 $1.40 $16.80 $0

6 How to invest in a Macquarie MINI? 1. Select the underlying asset 2. Select a MINI Long or MINI Short to reflect the direction of your view 3. Review the Daily Pricing Sheet and select your Strike Price. Where more than one MINI or Strike Price is offered select the Strike Price that best reflects the level of leverage you want 4. Check the Stop Loss Level of the MINI you have chosen on the pricing sheet 5. Place your trade online or with your broker/adviser just like you would with an ordinary share investment. You may need to ensure that your account is setup to trade warrants. How to identify a Macquarie MINI? Macquarie offers a range of MINIs. Macquarie MINIs may be identified as follows: The 5th letter tells you who the product issuer is. Macquarie is M. CBA K M A The first three letters tell you what the underlying share is. The last letter tells you the MINI series. The 4th letter tells you the product type. MINIs are always K. What are the key risks? MINIs are a leveraged instrument and as such investors should familiarise themselves with the risks and mechanics of MINIs. Investors should read the Product Disclosure Statement (PDS) as well as the daily pricing sheet before investing in a MINI. The Macquarie MINIs PDS can be obtained from the ASX website or from the Macquarie MINIs website. The risks of investing in Macquarie MINIs are outlined in the PDS however a summary of some of the risks include: Performance risk: the underlying investment may not perform well and consideration should be given to the performance required to break-even and the impact of the funding cost adjustment on any break even Leverage risk: losses and gains will be magnified Counterparty/Issuer risk: obligations are unsecured contractual obligations Stop loss Risk: There is no certainty that Macquarie will be able to achieve the stop loss price when determining the stop loss amount and you may lose all of your initial investment Liquidity risk: at certain times there may be limited or no liquidity in the MINI Early termination: Macquarie may terminate a Macquarie MINI on the occurrence of an Issuer Call Event or Extraordinary Event You should ensure you have read the PDS before making any decision to invest in Macquarie MINIs and/or seek professional advice. Contact us For more information on Macquarie MINIs contact us on: minis@macquarie.com Important information Macquarie MINIs ( Macquarie MINIs ) are issued by Macquarie Bank Limited (ABN and AFSL ) ( Macquarie ). Macquarie MINIs are issued pursuant to a Product Disclosure Statement which may be amended or supplemented from time to time. You should carefully consider the relevant offer document for the product that you want to invest in before making any investment decision, including whether to acquire, or continue to invest in, that product. Not a recommendation or expression of opinion: In providing this information to you, Macquarie has not taken account of your objectives, financial situation or needs. The information is not an expression of opinion or recommendation. It does not constitute financial advice and should not be relied on as such. Macquarie is not your fiduciary or adviser and we recommend you obtain financial, legal and taxation advice before making any investment decision. It is also important that you consider the risks associated with investing in any financial product issued by Macquarie, or acquiring any financial service provided by Macquarie and discuss the risks with your independent advisers. Past performance: Past performance is not a reliable indicator of future performance which may differ materially. No tax advice: Macquarie does not give tax advice. Any tax discussion in this document is based on laws and anticipated legislation at the time of writing, which may change. How tax laws apply to you depends on your circumstances and you should seek professional advice before investing. Macquarie Research Equities ( MRE ): MRE and Macquarie are wholly owned subsidiaries of Macquarie Group Limited. MRE does not endorse or recommend any investment in any financial product issued by Macquarie. Macquarie Group s interest: Macquarie will receive remuneration from you investing in a financial product issued by Macquarie and/or providing you with a financial service. Macquarie may pay commissions to introducing advisers (including related entities of Macquarie). Additionally, Macquarie or any of its related bodies corporate, officers or employees (Macquarie Group), may from time to time have long or short positions, make a market in, or otherwise buy or sell instruments identical or economically related to any financial product or other security that you have any interest in (and Macquarie s interest may be opposite to yours). The Macquarie Group may have an investment banking or other commercial relationship with the issuer of any security or financial product in which you have an interest by acting in various roles including as underwriter, dealer, holder of principal positions, banker, broker, lender or adviser. The Macquarie Group may receive fees, commissions or other remuneration from such activities. All information is current as at 28 February 2012 (unless otherwise specified) and is subject to change without notice. Macquarie Group