Market volatility draws attention to STI contracts
RECENT market volatility caused by the troubled sub-prime mortgage market in the United States has put the spotlight on warrants of the Straits Times Index (STI).
‘One can buy a call warrant if one expects a rebound or a put warrant if one thinks the market will slide,’ said Mr Ooi Lid Seng, Societe Generale’s (SG) vice-president of structured products for Asia excluding Japan.
He highlighted two contracts from the French bank.
The first was a call warrant expiring on Oct 30, which pays investors if the STI tops the 3,500 mark.
That ended down 6.5 cents at 42 cents last Friday, with a volume of 9.45 million units - one of the most heavily traded STI contracts.
The second was a put warrant expiring on the same day, which pays out if the index dips below the 3,400 level.
That contract finished 13 cents lower at 72 cents last Friday with 962,000 units traded.
Mr Ooi said: ‘The conversion ratio of the two warrants, which is 300 warrants to one unit of the STI, are the lowest in the market. Hence, it’s more responsive to any movements in the STI.’
Global stock markets have been enduring a roller-coaster ride recently, due to growing credit market turmoil in the US.
Analysts said investors are alarmed by signs that the fallout from the US sub-prime mortgage market may be spreading to other regions.
Sub-prime mortgages refer to home loans made to people with poor credit scores that were packaged into pools and sold to investors.
The worries about the credit market have been exacerbated by the widespread unwinding of shareholdings, especially by global hedge funds.
The STI closed at 3,359.19 last Friday - down 76.86 points or 2.24 per cent - from the previous week.
Last week, the average daily volume for the four trading days was 2.44 billion shares worth $2.7 billion, compared with 3.38 billion shares valued at $3.23 billion the previous week.
A call warrant lets an investor buy into a stock or index at a pre-set price over a period of three to nine months.
A put warrant allows an investor to sell the stock or index at a pre-set price over a period of time.
Source : Straits Times - 13 Aug 2007
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