17 November 2009
Standard Bank has launched JSE-listed currency reference warrants, a first for the South African market, in response to the growing popularity of currency trading in the country.
A currency reference warrant (CRW) 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 are also 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, which are listed on the JSE, enable investors to trade currency as an asset class to protect themselves or take advantage of movements of the South African rand,” Standard Bank derivatives head Brett Duncan said in a statement this week.
According to the bank, the JSE is supportive of the product listing.
Investing in currency
Duncan explained that 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, providing investors with leveraged exposure to an exchange rate.
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.
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,” said Standard Bank foreign exchange head Richard de Roos.
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. The warrants 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.
Traditional equity market
According to JSE chief operating officer Leanne Parsons, CRWs extend the exchange’s 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.”
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