Index warrants issued by Macquarie

What is an index warrant?

An index warrant is a structured warrant (“SW”) that is issued over an underlying index e.g. the Hang Seng Index or the FTSE Bursa Malaysia KLCI. The index call warrant tracks the performance of the underlying index i.e. it will tend to increase in value when the underlying index increases. The opposite is true for an index put warrant, whose price will go up when the underlying index decreases.

The Standard & Poor’s 500 index (“S&P 500®”)

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and is one of the most followed equity indices in the world. There is over USD 7.8 trillion benchmarked to the S&P 500® and it captures approximately 80% of the U.S. market capitalization. The index tracks 500 of the largest companies listed on the New York Stock Exchange and the NASDAQ including, Apple Inc, Johnson and Johnson, General Electric, Microsoft Corp, Facebook Inc, etc..

The Standard & Poor’s 500 index (“S&P 500®”)

The iShares FTSE A50 China Index ETF (“A50 China ETF”) is an exchange traded fund listed on the Stock Exchange of Hong Kong (SEHK), whose movement closely corresponds to the performance of the FTSE China A50 Index. The index is designed to represent the performance of the mainland Chinese market through the 50 largest A Share companies listed on the Shanghai and Shenzhen stock exchanges.

Hang Seng Index (“HSI”)

The HSI is the most widely quoted performance indicator of the Hong Kong share market, and one of the most watched indexes in the region. Comprising 50 of the largest shares on the Hong Kong exchange, it tracks the movement in the Hong Kong market and is very closely linked to the Chinese economy. Many investors across the world use the HSI as a proxy to invest into China.

FTSE Bursa Malaysia KLCI (“FBMKLCI”)

The FBMKLCI is comprised of the top 30 companies by market capitalization on the Bursa Malaysia Main Market, including Maybank, Tenaga Nasional, Public Bank, Sime Darby and other household names. It is the headline index for the Bursa and is the most widely used benchmark to track the performance of the Malaysian market.

The FBM KLCI futures (“FKLI”) are listed and traded on the Bursa Malaysia, the FBMKLCI warrant price is linked to the movements in the futures price over time and at expiry settlement will be based on the closing level of the relevant futures expiry.

Why trade index warrants?

The key advantages of index warrants are:

1. Allow you to take a view on the general market direction

   By gaining access to the index, you remove the need to select a share and instead take a view on the market as a whole.

2. Able to profit from both rises and falls

   Index warrants allow you to take either a bullish (call warrant) or a bearish (put warrant) view on the market. So you have the potential to profit from both rises and falls in the market.

3. Get exposure to different markets

   Index warrants allow you to get exposure to foreign markets like Hong Kong (e.g. the HSI Index) without having to leave the Bursa Malaysia.

4. Hedge your share portfolio

   Index put warrants allow you the potential to profit from downward movements in the market, making them a useful hedge for a diversified share portfolio.

How to trade index warrants?

Index call warrant

If you have a bullish view on the S&P 500®, you can buy a call warrant e.g. SP500-CA. Example as follow:

Index put warrant

If you have a bearish view on the FBMKLCI, you can buy a put warrant over FBMKLCI e.g. FBMKLCI-HW. Example as follow:

Assuming your view was right, if you have bought the put warrant instead of shorting the underlying index, you would have made a 12.5% return, almost 5 times that of the index level move.

These are examples of gearing at work and the advantage that warrants offer i.e. a greater potential profit as a percentage of your invested capital. However, gearing works in both directions, so greater potential returns also come with greater risk.

How to calculate the cash settlement amount at expiry?

Your index warrant will be automatically exercised if you hold it until expiry. If the Cash Settlement Amount (“CSA”) is positive, Macquarie will make a cheque payment to you within 7 market days after expiry.

The FX rate component takes into consideration the underlying indexes that are denominated in a foreign currency and not MYR.

Example of an S&P 500® call warrant:

Example of an FBMKLCI put warrant: