Australian market Update

Submitted by Jim Thesiger on 11 June, 2008 - 13:46

Here is an update on the Australian market provided by Australian market analyst UBS.

Benefit From a Bounce In The Market.

In mid May the market pushed towards breaking the 6000 point benchmark but was unable to break through, since then the market has slipped downwards over 500 points. The market closed at 5437.5 yesterday, the lowest level seen since April 18 and the major question being asked is “When will the market bounce and what stocks will benefit most from a turnaround in sentiment?” In todays note we will try and simplify the equation by investigating how to use index warrants and instalments over SPDR S&P/ASX 200 Fund (STW) to gain exposure to the market as a whole.

Index Warrants

Macquarie Index Warrants give investors geared exposure to the S&P ASX 200 index. If you have a positive view of the Australian market as a whole but have concerns about getting “unlucky” by picking a stock that underperforms the market then index warrants are perfect to reduce company specific risk. Another feature of index warrants is that you can gain downside exposure using put warrants. An example of the upside exposure that you gain by using XJOUMI on 11/06/08 is as follows:

Exposure = # of Warrants * Strike * Multiplier
Exposure = 1,000 * 5500 * 0.005
Exposure = $27,500
Cost = # of Warrants * Price
Cost = 1,000 * 1.42 = $1,420

Another consideration when choosing an index warrant is the warrants sensitivity to movements in the index. On the Indicative Pricing Matrix that is sent out each day via email or saved in the Daily Trader Website you can identify the specific delta for each warrant. An important point to note is that due to the multiplier of 0.005, the highest delta a warrant will have is a delta of 0.5%. An indicative example of how to apply the delta to an index warrant follows.

Delta of XJOUMI: 0.240%
SPI (APM8) Level when position opened: 5410
SPI (APM8) Level when position opened: 5460
Price change in warrant = Change in SPI * Delta
Price change in warrant = 50 * 0.0024
Price change in warrant = 12 cents

Instalments over STW

Index warrants are highly geared and short dated and great for short term trades, but if you are looking for something more long dated there is a range of Regular and Self Funding Instalments over STW to choose from. The maturities range from 17/11/08 to 28/06/2013 with gearing levels between 70% to 23%. STW is an exchange traded fund issued by State Street Global Advisors Australia, Limited. For more information on the fund visit their website;