Capital Plus offer you the opportunity to participate in the performance of an underlying asset (usually a basket of 10 Australian shares), while at the same time guaranteeing a certain minimum value at maturity.
- They are usually issued at face value, which is either $1,000 or $1.00. At least this amount will be returned to you at expiry of the warrant.
- During the life of the warrant, you participate in the performance of the underlying securities. This is usually a basket of 10 Australian shares. The participation rate varies between different series.
- 100 per cent guarantee on the issue price at maturity.
- Holders will receive a performance bonus on the profit at maturity (eg 10%)
- At expiry you can elect either to take delivery of the underlying securities or to receive a cash payment.
- The first four letters of the ASX code are CPXX for $1,000 face value, and CLPX for $1.00 face value.
Benefits of Capital Plus
Because capital protected warrants usually cover a range of shares in one product, you can gain exposure to those shares with a relatively small investment. This may help you in diversifying your overall share portfolio.
Capital protected warrants offer leveraged exposure to the underlying shares, with the benefit of a capital guarantee at expiry.
Risks of Capital Plus
- The underlying asset fails to perform as you expected. The initial capital is only guaranteed at expiry. You may be forced to sell your warrants at a loss. When investing in warrants, the maximum amount you can lose is your initial investment (plus transaction costs).
- Because warrants are issued by financial institutions, you are exposed to the credit risk of the warrant issuer.
Example of a Capital Plus
|Underlying instrument||A basket of ASX listed securities|
|Warrant type||Capital Plus|
|Expiry date||29 January 2010|
|Settlement||Deliverable or cash settled|
If you buy CLPXMH on the issue date you would have exposure to a basket of 10 leading Australian shares. The cost of each warrant is $1.00. The initial weighting of the shares in the portfolio is 10% each. The gearing rate for these CLPXMH is 20%.
Assume the value of the basket has risen to $1.50 by the expiry date. You could exercise CLPXMH and call for delivery of the shares. Alternatively, you could instruct the issuer to sell the shares in the basket and receive a cash payment. You would then be entitled to receive your initial $1.00 investment plus an amount equal to the increase in the value of the basket plus an extra 20% of this increase.
|Value of the basket on expiry||$1.50|
|Initial value of basket||$1.00|
|Increase in value||$0.50|
|Payment to holder|
|Increase in value||$0.50|
|Gearing (20% of profit)||$0.10|
If the value of the portfolio had fallen to, say, $0.85 at the expiry date, then the initial investment of $1.00 would be paid to you.
The disclosure document outlines the terms and conditions for each warrant series. You should be familiar with those prior to trading. You can access information on how to find a disclosure document on the ASX website. Alternatively, you may contact your adviser or the warrant issuer.
To learn more about capital protected products, visit our online warrants class.