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16 November 2009
Standard Bank launches currency reference warrants
In a first for the South African market,Standard Bank has launched currency reference warrants (CRW) in response to the growing popularity of currency trading in South Africa.
Says Brett Duncan, Director; Equity Derivatives at Standard Bank: “CRWs, which are listed on the Johannesburg Stock Exchange (JSE), enable investors to trade currency as an asset class to protect themselves or take advantage of movements of the South African rand .”
The JSE is supportive of the product listing.
“CRWs extend our currency product offerings and will be incorporated amongst the existing warrants traded. They will be traded on the traditional equity market. The warrant market has grown significantly in recent years,” says Leanne Parsons, Chief Operating Officer at the JSE.
Exchange rates and in particular the dollar/rand are typically understood by South Africans as an independent determinant of a country’s performance. “Individuals are increasingly becoming more and more curious of the earning potential attached to currency price movements and are including currency as an independent asset class in their investment portfolios,” says Richard de Roos, Director and Head of Foreign Exchange at Standard Bank.
A currency reference warrant is a derivative – its value is derived from another underlying asset, in this case an exchange rate. More specifically, its value is based on the change in the rand price of one unit of a specified foreign currency.
“CRWs come in both calls and puts, allowing investors to take advantage of positive and negative views of the future direction of the South African rand. They provide investors with leveraged exposure to an exchange rate,” says Duncan.
Depending on the type of warrant traded, an investor can either buy or sell the performance of the rand against a certain foreign currency, such as the US dollar, at a specific rate and on a specific date.
A CRW’s intrinsic value is determined from the difference between the exchange rate at maturity of the warrant and the strike price or exercise price agreed. CRWs are cash settled in rands, which means that there is no transfer or settlement of foreign currency and they do not affect an individual’s R4 million offshore allowance.
CRWs can only be exercised at maturity, at which point investors are paid their intrinsic value. However, CRWs can be bought and sold up until expiry.
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