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This article appeared in the May 2011 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

See how these warrants provide leverage without the margin calls.

Photo of Asanth Sebastian By Asanth Sebastian, ASX

MINIs are a straightforward trading product that give investors leveraged exposure to shares, indices, commodities and currencies in a similar way to products such as contracts for difference (CFD). But there are key differences, such as no margin calls at any time, and one-for-one exposure with the underlying asset.

Because of these features, MINIs are growing in popularity, and investors now have more choice and competition with a new entrant in the MINI market, CitiFirst Warrants.

The ASX warrants market began in 1991 when the first call warrant was listed by Macquarie Bank over Boral shares. Over the past 20 years the market has expanded exponentially and is now one of the most developed warrants markets globally.

Over the years, issuers have developed and provided a diverse range of innovative products to match investor demand. For example, the advent of instalment warrants gave an investment-style warrant category. Recent market conditions have led to renewed interest in leveraged trading products such as CFDs and MINIs.

MINIs were introduced to the Australian warrants market in 2007 by the Royal Bank of Scotland (then ABN AMRO). Over the next three years the MINIs market continued to grow and evolve, particularly as a result of market volatility and investors taking directional views on various shares or looking to protect their portfolios.

Growth of the market

Today, MINIs account for 25 per cent of all turnover in the warrants market and investors can trade alternative asset classes such as international indices, currencies and commodities. Along with alternative asset classes, investors now have more choice in issuers, such as CitiFirst Warrants recently with its range of MINIs.

David Anderson of CitiFirst says: “With investor confidence returning, the time is right to offer investors a choice of product providers. MINIs complement our established warrants and instalment business and cater for the astute Australian investor who seeks further market opportunities.”

The mechanics of MINIs

MINIs can be described as a simple, transparent leveraged product that always trades on a one-for-one basis with the underlying asset. So if your share moves by $1, your MINI would move by the same amount. An investor cannot lose more than their initial outlay and there are no margin calls at any time. However, if the MINI price moves beyond a stop-loss point (down for long positions or up for short positions), the MINI is stopped (see below).

As for the pricing of a MINI, there are two very simple equations to take into account when an investor goes either long or short:

  • MINI long = Share price – Strike price of MINI
  • MINI short = Strike price of MINI – Share price

The stop-loss feature ensures that an investor cannot lose more than their initial outlay. The level at which the stop-loss is set varies according to the underlying instrument.

The following case study helps to explain the key concepts of how MINIs work.

Directional trade on BHP

Assume a trader holds a view that BHP Billiton shares will rise in the short term and decides to use the BHPKOB Citi MINI long to gain leveraged exposure for the trade. BHP is trading at $46.46 on April 1, 2011. The MINI long has a strike price of $33.12 and a stop-loss at $36.43.

BHPKOB MINI long price = share price ($46.46) – strike price ($33.12) = $13.34

This means buying one BHPKOB MINI long for $13.34 gives leveraged exposure to one BHP share.

On April 12, BHP has increased in value and is trading at $49.07. This table compares the returns by investing in the shares or the MINI.

   Stock MINI BHPKOP Strike $33.12 
 Buy Price (01/01/2011)  $46.46  $13.34
 Sell Price (12/04/2011)  $49.07  $15.85
 New Strike  -  $33.22
 Stop-loss level  -  $36.43
 Total return  $2.61  $2.51
 Percentage return on initial investment (not annualised)  5.6%  18.8%

The table shows the trader made $2.61 on the share transaction, or $2.51 on his MINIs transaction. This equates to a 5.6 per cent return on the share position compared with an 18.8 per cent return on the MINI position, as the MINI requires less capital.

The difference of 10 cents between the two transactions is the funding cost of holding the MINIs position over the 10 days. The funding cost charged by the warrant issuer is reflected in the strike price, which has increased from $33.12 to $33.22 over the period.

We can also see that the trader has improved returns through the leveraged nature of MINIs. If the position moved against the trader, they may be liable for increased losses in percentage terms, but at no time would they be liable for a margin call or additional funding. The downside risk is known when you enter a MINIs position; the maximum at risk is your initial investment. This is an advantage of MINIs over some other styles of leveraged products.

'The time was right'

Rebecca Fesq, Citigroup Global Markets’ vice-president, warrants and structured product sales, says: “With growing investor appetite for a straightforward, more transparent style of leveraged trading product, Citi felt the time was right to issue MINIs in the Australian market and provide investors with a choice of product provider. MINIs add another dimension to our CitiFirst suite of trading and investment products – including instalments, self-funding instalments, turbos, trading warrants and funds – by catering to specific investor needs.”
Fesq says MINIs are proving to be a popular form of obtaining leveraged exposure to either rising or falling markets, with demand from Australian investors growing year on year. “CitiFirst MINIs are ASX-traded and investors’ risk is limited to the initial investment amount. They will never receive margin calls or be asked to lodge collateral,” she says.
“For a fraction of the cost of trading the underlying assets directly, the value of the MINI tracks the underlying one-for-one, thereby offering leveraged returns. Also, as MINIs are open-ended, investors do not need to worry about completing maturity notices or exercising their positions.

“In addition to having leveraged exposure, investors could also use CitiFirst MINI Shorts to effectively and efficiently hedge shares or their investment portfolio. Since launching MINIs we have experienced strong interest in the product, which is pleasing given that they are still relatively new in the Australian market.” 

Investors and traders looking for more information should view the ASX webinar on MINIs. There are a number of other resources available, particularly from the issuers’ websites, which provide an “idea of the week” theme for investors about trading strategy.

To register your interest in upcoming ASX seminars on MINIs sign up to our 'Keep me posted' mailing list.

About the author

Asanth Sebastian is a business development manager at ASX.

From ASX

Learn about the features, benefits and risk of warrants through the free online ASX Warrants and Instalments Courses. This interactive course has been structured to cover all aspects of the warrants market and allow you to progress through all topics or select one of particular interest.

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