Introducing ABN AMRO MINIs

MINIs at a glance

MINIs are a new share-tracking derivative product quoted on the ASX. They enable investors to participate in the movement of an underlying asset on a one to one basis for a fraction of its price. They are indeed very similar to existing web-based share-tracking products, such as over-the-counter CFDs, but with a variety of enhancements and advantages. The product offers unlimited upside returns with a safety net.

ABN AMRO first listed MINIs in Europe five years ago, and within 12 months became the most popular equity leverage product traded by retail investors.

There are two types of MINIs issued by ABN AMRO:

• Mini Longs enable leveraged participation in rising equities markets; and
• Mini Shorts enable leveraged participation in falling equities markets.

For Australian investors, MINIs offer a more simple and transparent leveraged share-tracking product (compared to over-the-counter CFDs) and are traded on the market operated and supervised by the ASX. Trade execution on the ASX is prompt, independent and anonymous, minimising market impact costs for investors.  Further, trading volumes and prices of MINIs are monitored daily by the ASX, providing a fully disclosed framework for trade reporting.

MINIs incorporate a limited recourse loan and feature a Stop Loss Level that ensures investors never pay any more than the amount of capital initially outlaid. While the upside potential is unlimited, downside risk is limited.

Since daily funding costs associated with the loan are not charged intra-day, MINIs are an ideal form of leverage for day-traders, while the absence of expiry dates removes the associated hassles such as the decision to exercise, paperwork, fees and brokerage.

What are the key features of MINIs?

MINIs offer leveraged exposure to underlying shares for a fraction of the price but are designed to track the performance of shares on a one-for-one basis. They are similar to other web-based securities-tracking investment products however there are a few key differences, for example, MINIs issued by ABN AMRO:

• Do not have initial collateral requirements and do not involve margin payments;
• Are ASX quoted and traded;
• Can incur lower funding charges as funding is charged only on the strike price and not the full notional amount of the investment;
• Incur lower brokerage since you are charged on the price of the Mini not the nominal value of the underlying shares; and
• Do not allow investors to lose more than their initial Capital Outlay.

What are the additional benefits of trading MINIs?

MINIs are American style instruments, meaning they can be exercised at any time. Since they have no expiry date, MINIs have the quality of being an open-ended contract for the purposes of trading. As a result, MINIs are low maintenance leveraged investments minimising the hassles of expiries and rollovers.

Other benefits include:

• Simpler, and more transparent than other web-based share-tracking products [such as over-the-counter CFDs] - they are traded on the market operated and supervised by ASX
• The ability to lock in profits without having to sell underlying shares
• Leveraged participation in the underlying shares one-for-one
• Funding Costs charged on a daily basis so that day-traders don’t pay intra-day
• Limited recourse loan and Stop Loss Levels protect investors against losing more than their initial Capital Outlay
• No margin requirements.

 How do MINIs work?

MINIs are quoted and track the price of an underlying equity asset. The price of the Mini reflects the Intrinsic Value which equals the difference between the market price in the underlying asset and the Strike Price of the quoted Mini but not less than zero.
Strike Price (or Financing Level) is the portion of the underlying price that the issuer funds on behalf of the Holder.

Value of an Mini Long = Share Price – Strike Price
Value of an Mini Short = Strike Price – Share Price

An initial capital outlay is required in order to acquire a Mini from ABN AMRO.  Funding Costs however are charged on a daily basis via daily incremental Strike Price changes, thus the Strike Price of a Mini is set daily and Funding Costs are added to the Strike Price for long investors and for short investors in most cases an interest credit is passed on to the investor via an incremental strike increase.

An example of how Investors can profit from a MINI Long:
Imagine BHP is trading at $35 dollars, and the purchase price for our MINI is $5.00 (i.e. with a strike price of $30.00).
If BHP were to rise $1 to $36 over the day our percentage profit on the underlying share would be:
($36 -$35) / $35 = 2.86%
Now let’s compare the percentage return on a MINI Long for the same $1 increase in BHP.
Because a MINI Long moves cent for cent with the underlying share, if BHP increased $1, the MINI Long would also increase $1 to $6. In this situation our return on the MINI Long would be:
($6- $5) / $5 = 20%
This highlights how the leverage of a MINI can potentially amplify returns for investors.

Who should trade MINIs?

• Day traders
  Funding Costs associated with MINIs are only relevant to the extent of use and are calculated daily. As a result intra-day trades do not attract Funding Costs, so leverage is virtually free of charge for day-traders. Additionally, Funding Costs are not paid upfront.  They are charged on a daily basis via incremental Strike Price changes.
  
• Speculators
  The leveraging effect of MINIs makes them an attractive trading instrument for speculators. Investors are able to gain 100% tracking exposure to an underlying share for only a fraction of the price without putting more than their initial capital at risk.
  
• Portfolio protection
  Mini Shorts can be used as effective insurance for a portfolio enabling investors to lock in profits gained from their shareholding without having to sell out of that holding. Since MINIs have no maturity restriction, they may be used as part of a longer term portfolio hedging strategy.

If you would like more information about MINIs please contact your financial adviser or contact ABN AMRO on 1800 450 005.

More information

MINIs are quoted on the ASX and can be purchased like shares through your stockbroker, financial adviser, or any online discount broker. ABN AMRO issues MINIs over a variety of Blue Chip and high growth/high yield stocks. Visit ABN AMRO MINIs for a complete list or call 1800 450 005.

The information contained in this report has been taken from sources believed to be reliable. ABN AMRO Australia Pty Ltd (ABN 84 002 768 701, AFS Licence No. 240530) (“ABN AMRO Australia Pty Ltd”) does not represent that the information is accurate or complete and it should not be relied on as such. Any opinions expressed reflect ABN AMRO Australia Pty Ltd judgement at this date and are subject to change. ABN AMRO Australia Pty Ltd and/or its affiliated companies may make markets in the securities discussed. Further ABN AMRO Australia Pty Ltd and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this report and may, as principal or agent, sell such securities. ABN AMRO Australia Pty Ltd may have acted as manager or co-manager of a public offering of any such securities in the past three years. ABN AMRO Australia Pty Ltd affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever. ABN AMRO, in preparing this report, has not taken into account an individual client’s investment objectives, financial situation or particular needs. Before a client makes an investment decision, a client should, with or without ABN AMRO’s assistance, consider whether any advice contained in the report is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal securities recommendation. For clients in the USA, ABN AMRO Incorporated does not accept responsibility for the contents of this report. This report is distributed in the U.S. solely to “major institutional investors” as defined in Rule 15a-6 (US Securities Exchange Act 1934). Each US recipient by its acceptance hereof warrants that it: is a “major institutional investor”, as defined; understands the risks involved in dealing in the Securities or any related investments or instruments; and shall not distribute nor provide this report, or any part thereof, to any other person. Any US recipient wishing to effect a transaction in any security mentioned herein, or any related investment or instrument, should do so by contacting ABN AMRO Incorporated and not ABN AMRO Australia Pty Ltd. For clients in the UK, ABN AMRO Equities (UK) Limited accepts responsibility for the contents of this research material.
The warrants mentioned in this report are issued by ABN AMRO Australia Pty Ltd (ABN 78 000 862 797, AFS Licence No.247013). The Product Disclosure Statement ("PDS") relating to these warrants is available upon request from ABN AMRO (1800 450 005) or on our website www.abnamro.com.au/warrants/circulars.asa .
2007 ABN AMRO Australia Pty Ltd (ABN 84 002 768 701) A Participant of the ASX Group.

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