Introduction to Corporate Finance

OPTIONS

8-1 Options vocabulary

8-2 Option payoff diagrams

8-3 Qualitative analysis of option prices

8-4 Option pricing models

8-5 Options in corporate finance

INCREASING YOUR (INVESTMENT) OPTIONS

In its recent product disclosure statement, CitiFirst,

part of the CitiGroup in Australia, promotes ‘CitiFirst

MINIs’ for investors. These are financial products,

warrants, traded on the Australian Securities

Exchange (ASX) in the same way that shares are

traded. According to CitiFirst’s statement, a warrant

‘is a derivative, and as such, derives its value from an

underlying instrument. The underlying instrument

can be a security or securities, an index, a commodity

or a currency’. The underlying instrument is usually

referred to as the Underlying Parcel. CitiFirst MINIs are

structured as either ‘call warrants’ or ‘put warrants’.

The warrants are listed as being available over

a large number of Australian companies, including

Australia and New Zealand Banking Group Limited,

BHP Billiton Limited, Commonwealth Bank of

Australia, Navitas, Macquarie Group Limited,

National Australia Bank Limited, Newcrest Mining

Limited, Orica Ltd, QBE Insurance Group Limited,

Rio Tinto Limited, Seek Limited, Wesfarmers Limited

and Westpac Banking Corporation.

The statement lists some potential benefits for

investors who buy and hold CitiFirst MINIs:

• being exposed to the price movements of the
  underlying asset, such as a share at a fraction of
  the cost of buying the underlying asset itself


• having the ability to buy and sell the CitiFirst
  MINIs on ASX at any time prior to the date
  when the warrants expire


• being able to capture greater returns per dollar
  of investment than if the investor bought and
  held the underlying asset itself, because the
  warrant effectively ‘leverages’ the investment


• having the ability to fix the price at which the
  underlying asset such as shares could be bought –
  this is a prime advantage of an option to buy


• being able to take advantage of both rising and
  falling markets.

what companies do

Express

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