DERIVATIVES

Table of Contents

1. Introduction by Neil Costa
2. Trading the Australian Dollar Using ASX Listed Warrants - Justin Crawford
3. AMP - A Lower Risk Exposure by Ian Keys
4. Postcard From The Trenches, George Morgan
5. Link to web site or download .pdf version

Welcome To Derivatives
By Neil A. Costa

Welcome to the March 2003 edition of the Australian Investors' Association (ASA) newsletter on derivatives. As this edition hits the cyber waves, we are in a climate of great uncertainty. Uncertainty is an enemy of traders and investors.

In this edition of Derivatives, we have three more excellent articles - 'Trading the Australian Dollar Using ASX Listed Warrants' by Justin Crawford, 'AMP - A Lower Risk Exposure' by Ian Keys and 'Postcard from the Trenches' by George Morgan.

Please do not hesitate to submit an article for publication. The article can discuss how you use derivatives, or be about a trade you have made - successful or otherwise. If you wish to remain anonymous, this can be accommodated. You may simply wish to ask a question, the answer to which will assist you and many other readers. If you would like to contribute, please send any articles or questions to me - neil@marketmasters.com.au or at www.marketmasters.com.au.

Finally, our webmaster Bob has requested that charts and so on, in articles for publication, must have reasonable definition. Websites need higher definition than Word documents. All articles appearing in Derivates are placed on the Australian Investors' Association website.

Until the next edition,
Neil Costa

Trading the Australian Dollar using ASX listed warrants

By Justin Crawford

The Australian dollar is one of the world's most actively traded currencies, and due to it's volatility can provide many trading opportunities for short-term traders. Individual investors can easily track the currency's movements as every night the national newsreaders report to us the level at which the Australian Dollar is trading in terms of the US Dollar.

So how do you take advantage of the trading opportunity and your view on the currency?

One way is to look at the most accessible tool - Currency Warrants. They are listed on the Australian Stock Exchange and can be traded like ordinary shares via any stockbroker.

Currency Call warrants allow you to trade a positive view on the Australian Dollar, just like you would a normal warrants or share. Conversely the put warrant allows you to trade a negative view on the Australian Dollar.

How do they work?

Currency Warrants are similar to equity warrants, however they are based on a currency; the value of the Australian dollar in terms of the US dollar.

They give the holder the right to exchange an amount of foreign currency for Australian dollars at a particular exchange rate on or before a specified date.

Purchasing a call warrant means you have the view that the Australian dollar will appreciate against the Us Dollar. Like equity call warrants, the price of the call and the movement in this price, will depend on the actual exchange rate, the time the warrant has to expiry, interest rates and the volatility of the currency.

For example -

If the currency were trading at $0.60, the warrant would be offered at $0.38. If the currency went up to $0.61, the warrant would increase to $0.46 - an 8-cent move for a 0.01-cent move in the currency. This equates to a 21% return - thus showing the leverage that the currency warrant offers a trader.

Benefits of currency warrant.

· A convenient short term trading or hedging facility.
· Easily traded, listed on the ASX
· Market liquidity provided by Macquarie.
· No margin calls.
· Maximum loss limited to initial investment amount.

Risks

Currency Warrants are a leveraged investment which provide increased exposure to movements in the exchange rate and can therefore magnify both profits and losses.

Currency Warrants are designed for experienced warrant, option or share investors with reasonable knowledge of foreign exchange rates.

Choose a warrant

As always when choosing a warrant, you should determine

• Your view on the underlying - in this case the AUD in terms of USD
• Your time frame - when do you think the movement will happen - short or long term

Once you have formulated your view, choose the best warrant for that view from the list below.

For example, if you believe there will be short term gains in the currency - choose the June $0.59 call. If you believe there will be long term weakness - choose the $0.56 September Put.

More Information
Macquarie publishes the daily price matrix for its currency warrants at www.macquarie.com.au/warrants or call Justin Crawford with any questions on 1 800 803 010

Justin is Associate Director
in Macquarie's Equity Markets Group
and is responsible for the sale of trading warrant product.

AMP- A LOWER RISK EXPOSURE

By Ian Keys

To quote my now retired employer: "All you get when you try to pick the bottom is smelly fingers" - we want something more than that!!!!

So if you are looking to gain a more conservative entry into AMP, this may be the idea for you. If you already have AMP stock, you could also consider selling your shares for a capital loss and investing in the idea outlined below.

At $70.25 (04/03/03), the AMQHA perpetual floating rate note is yielding 8.556%!!!!

If there is a takeover, these notes may be bought back for $100 face value. Your risk is that if AMP goes broke, or is unable to pay its interest, these notes will be worth less. They are still an investment grade security, S & P rates this debt at a level of BBB+, which is behind only NAB as the highest rated floating rate note in the Australian market. If AMP were to be wound up you rank behind creditors and liabilities BUT AHEAD of shareholders in the queue to receive your money. Do I think that AMP will go broke - NO. Do I think that this is a much more conservative strategy than buying AMP stock - YES.

PART 2 - In order to participate in any upside in the AMP share price....

If you invest $100,000 in the floating rate note listed above, you will receive around $8600 for the year in interest. With part of that money, buy some long dated AMP call options:

BUY AMP DEC 03 $6.75 Calls 5 contracts @0.95 = 5000 x .95 = $4750

4 POSSIBLE OUTCOMES:

1. AMP GOES BROKE: You then have to wait until major creditors and liabilities are paid, you are then paid out of the balance of cash remaining from a sell down of AMP's assets. You rank in front of the shareholder, AND the company must pay back the face value if possible which is $100. If this is not possible you will receive a percentage of the $100 face value.

2. AMP DOES NOT GO BROKE, BUT THE SHARE PRICE DOES NOT RECOVER; If AMP do not go broke you will receive a minimum of $8600 -$4750(cost of calls) = $3850 = 3.85% which is close enough to current term deposit rates, this is assuming that your options are worth $0 on expiry (AMP below $6.75 in December). Your notes are perpetual meaning there is no expiry date, they are however traded on the ASX every day, so are extremely liquid. IF YOU ARE WORRIED YOU CAN SELL. Interest rate changes should not affect the value too much as the notes are set as a floating rate at a 1.3% premium to the cash rate.

3. AMP TURNS AROUND AND IS WORTH MORE THAN $6.75

You also receive great leverage to a turn around in the AMP share price. You still receive around 3.8% in interest PLUS you receive $50 for every cent (5000 x $0.01) that AMP is above $6.75 on expiry.

4. AMP IS TAKEN OVER: YOU HIT THE JACKPOT...... On top of interest that you receive until this happens, the notes that you paid $70 for may be redeemed at $100, plus interest accrued. You also achieve huge upside from the December $6.75 calls that you have purchased.

YIELD ON THE NOTE CAN BE EXPLAINED AS:

The yield is worked out as the prevailing 90-day bank bill rate PLUS 1.3%. As of yesterday (03/03/03) the futures for the 90-day bank bill for March were at 4.71%. ADD 1.3% for the risk premium and AMP must pay 6.01% for each security. HOW DO I GET 8.6% OUT OF IT??

The company pays 6.01% based on the face value of $100, as the security is now only worth $70.25, the yield is much higher = $6.01 / $70.25 = 8.55%

So, my idea is to buy AMQHA and to also buy some long dated AMP calls, as a more conservative way to get exposure to AMP than buying shares. This may look complicated, however with one consultation, or phone call you should have no difficulty understanding the idea.

PLEASE CALL IAN KEYS at HARTLEYS ON 1800 064 717 WITH ANY QUESTIONS, OR EMAIL: ian_keys@hartleys.com.au

Ian Keys is an ASX Accredited Level 1 and 2 Derivatives Advisor.

While the information contained in this newsletter has been prepared with all reasonable care from sources which Hartleys Limited ABN 67 009 136 029 believes are reliable, Hartleys does not give any representations or warranties as to the accuracy, reliability or completeness of the information and no responsibility or liability is accepted by Hartleys for any errors, omissions or misstatements however caused. Accordingly Hartleys, its related companies, officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to or arising in any way in connection with anything provided in or omitted from the newsletter or from any action taken in reliance on the newsletter to the full extent permitted by law.

Any securities recommendation contained in this publication is unsolicited general information only. In issuing this newsletter it is not possible to take into account the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their Investment Advisor to determine whether recommendations contained in this publication are appropriate to their investment objectives, financial situation or particular needs before acting on such recommendations.

Postcard from the Trenches

George Morgan

Trading the markets is often compared with doing battle or being in a war. In my previous articles I have spoken about Individual Share Futures and now I'd like to tell you about some of the trades we have been doing with them lately, some 'war stories' if you like. I use the term 'we' to mean one or more of our clients.

Short the Banks

This has been the best trade to come along in a long time. It has been virtually pick a bank and sell it to establish a short position. We sold CBA on a break of $27 and again on a break of $26, and we sold ANZ when it re-tested $17.00 after breaking through that level. We are still holding these positions.

Wesfarmers

This is an interesting trade that shows you can trade very short term. On 11 February the market for a perceived failure to meet profit targets savaged this stock. As you can see from the chart it fell from $28.25 down to $24.20. A few days later it had a strong up day and closed above $25. We bought 10 contracts (10,000 shares) and sold at $25.50 a couple of days later for a quick trading profit of $5,000 gross.

Wesfarmers Daily Bars

Fosters
We bought this stock at the beginning of the month on the basis of a very strong day's price action and it continues to languish at our entry price of around $4.33.

Mt Isa Mines
We bought this stock at $1.50 with the take-over offer at $1.70 on the table. We bought thinking that the downside risk was limited by the offer, but wound up exiting at $1.61 when the offer was with-drawn.

On the Horizon
We are interested in going short in Wesfarmers now. We have had the major sell-off, some consolidation, and now we are set to continue down. So here is a recommendation to finish up:

Sell Wesfarmers Individual Share Futures at $25.31, which is 20 cents lower than the actual share price.

Stay tuned for the next issue to see how this trade fares.

George Morgan is the Managing Director
of George Morgan Futures and has been a trader since 1983.
The company is a specialist private client futures broker
and trading house and George can be contacted by
email to george@gmfutures.com.au or
visit their web site at www.gmfutures.com.au.

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