Do they know what they are betting on?

My Dearest Moo Moo Cow,

Good Morning my dearest. Them Scousers won 3-0 against PSV. If you intent to catch some fast quick-eye tonight for MU big match against Roma, do expect them noisy Scousers making tons of noise tonight. Yeah, do ask them to keep quiet, we MU fans are trying to sleep!

Can we win? Well, my dearest Moo Moo Cow, I do hope so.

The biggest chatter yesterday was on the new bunch of Call Warrants or Structured Warrants listed by OSK. See, them went thru the orbit. Your beloved red wearing undies, super hero will never have a chance against these orbiting stocks.

And obviously, you will not be the first blogger on this issue. Sal, wrote the following pieces You Have Been Warned! and Cry Also No Tears!, while Alex wrote New CWs trading at premium of 50%! (re-posted) on his blog.

Let's take a look at what is happening. Take Genting-CD.

If the punters want to bet on it, they should know the simple betting rules lay out by the issuer of these call warrants. The following pdf file would be a great source of info. here for the pdf file.

Yes, my dearest Moo Moo Cow, it does make sense to know what one is betting on, right? Don't they call it as Cow Sense, my dearest?

Rule 1. Entitlement Ratio : Fifty (50) SW shall initially be entitled to one (1) GENTING Share

50 into one. Now you can't change it. The OSK Merchant bank is the banker or 'chong-kah' here. And they tell you that it's 50 into one, my dearest. Now take Genting-CD closing price yesterday of 0.365. It would mean that you need to buy 50 to exchange into one genting Cd. So which means, you need to bet 50 big ones to make your bet make cow sense, yes? That's an outlay of 18,250.00

Get Rule one, so far?

Rule 2. Exercise Price : RM39.00, being 99.4% of the Reference Price.

To change into one Genting, you need to pay 39,000. Now 39,000 + 18,250 = 57,250.00

So far so good? No problem?

Rule 3. Cash Settlement Amount : In respect of the valid exercise of each SW, the amount greater than zero (0), in RM calculated by the Issuer and verified by the Calculation Agent, in accordance to the following formula:-

(Settlement Price - Exercise Price)/Entitlement Ratio - Exercise Expense.

Where your settlement price represents the amount equal to:-

• (a) in relation to an exercise of an SW during the Exercise Period, the closing price of GENTING Shares on the Valuation Date; and
• (b) in relation to the exercise of an SW on the Expiry Date, the arithmetic mean of the closing price of GENTING Shares for the five (5) scheduled Valuation Dates,

Sounds complicated, isn't it?

Make it easier. Do you know money line? Take money line as where the better makes the money.

Now the easeist cow sense money line would be a simplied equation: Exercise Price > Selling Price.

The exercise price using the assumption of 0.365 as the cost of one's bet, then the exercise price as calculated would be 57,250.

Selling Price = market price of Genting.

Genting yesterday closed at 40.00.

And since the selling price is clearly less than the buying price... who wins?? The bank wins!!

Which brings us to the last rule.

Rule 4. Time Frame. Expiry Date : The date falling six (6) months from and including the Issue Date

My dearest Moo Moo Cow, the bet expires in 6 months.

Which means, within the next 6 months, if the market selling price of genting is still less than 57.25, you lose the bet.

You get nothing!

Does it sound a good bet?

I wonder.

So are you betting that the merchant banker here has set an easy game in Genting CD? At a price of 0.365, the merchant banker will only lose money if Genting trades higher than 57.20. Genting is now 40.00. Which means in this 6 months time frame, Genting has to increase by a whopping 43% for them to lose money.

Now consider this. Say you are very confident it will happen. Genting will say increase to a market price of say 60.00 within this 6 months. Which means, assuming you are betting for the cash settlement, then your profit is 60.00 - 57.25 = 2.75.

Congratulations, you won rm2750 from a bet outlay of basically 18,250.00. A 15% return for your bet.

Now think of this way. Ask yourself if the bet makes cow sense? Is this the best bet available? Cos if you lose, you lose whatever you could salvage by selling all those 50 shares of call warrants you bought in the market.

But...

Think of this. Now if you are seriously sure that Genting will surge past rm60.00, at 40.00, you are expecting Genting share price to increase by a whopping 50%.

Say doc, if Genting can increase by 50%, why don't you buy the Genting share instead?

Yeah, why not?

Wouldn't you agree, my Moo Moo Cow? Does it not make cow sense?

You bet the call warrant for the settlement price, you only get 15%. But if you bet the Genting share itself, you can make 50%. Which sounds a better bet to you, don't you think so, my dearest Moo Moo Cow?

Ah... but life is always complicated.

Yes it is. No buts.

See the common thinking is, if Genting does some hippy, hippy shake movement upwards, the call warrants would move in tandem if the Genting share.

And so, the game of the musical chair is played and will always be played.

Last one left holding the shares is the dead duck or as some crazy bugger would call it as the 'mati-katak'!!

Who cares about the money line and exercise price??? Who cares?!!

Right.

And as long as Genting share price, moves up... one can always sell the call warrant and take profit.

Well, if you have no problem in such a bet, neither should I.

How now my dearest Moo Moo Cow?