NEW MARKET EMERGES IN WARRANTS FOR GOLD
A new market has emerged in warrants to
buy gold, a vehicle which bankers say brings some of the play
of commodity options into the field of securities.
    Over the past three weeks, Swiss offices of American banks
have launched a total of four issues of warrants with varying
conditions, drawing on renewed inflationary worries and the
recovery of the gold price last year.
    And Credit Suisse and Credit Suisse-First Boston each
issued Swiss franc bonds with warrants for gold which have a
similar character, though they are aimed at a less professional
market.
    The market is still small. Taken together, the four
American-led warrant issues raised only about 50 mln Swiss
francs.
    But banks believe the vehicle meets a need of investors and
predicted a lively future.
    Andrew Barrett of Citicorp Investment Bank (Switzerland) AG
said: "The warrants give smaller investors a chance to have a
long-term investment in gold with limited risk."
    Citicorp in Zurich launched the first of these warrants on
February 27, following it up with a second issue less than a
week later. The issuer in both cases was Citibank NA.
    The idea found some quick copies. Goldman Sachs in Zurich
organized and co-led an issue for the Swiss branch of Banque
Indosuez on March 9 and last night Morgan Guaranty
(Switzerland) AG did another for Morgan Guaranty Trust Co of
New York.
    The four issues now offer investors striking prices for
gold ranging from the Indosuez issue at 410 dlrs an ounce, the
same price as the underlying commodity, to a 430 dlr level on
the first one for Citibank.
    The premiums range from 22 pct to 36 pct and maturities
from 18 months to four years and three months, in all cases
longer than gold futures and options on U.S. Markets.
    The bankers traced the inspiration for the market back to
the February report of U.S. Consumer prices for January, when a
jump of 0.7 pct raised again the threat of inflation.
    "Many people are worried about inflation again," said Mats
Joensson of Goldman Sachs. "Money supply in Germany and the
United States has grown very strongly in the last year and
people want to take a ride on gold."
    The gold market, having seen strong gains in 1986, has
languished just above 400 dlrs an ounce over the past few
weeks. But the banks saw in warrants the vehicle for a more
highly leveraged play where the downside risk was limited.
    Barrett said it was natural that the market developed in
Switzerland. "People here understand gold, and they understand
warrants," he said.
    Citicorp (Switzerland) pioneered warrants with a series of
equity-linked covered issues based on Japanese company shares
over the past two years, and last autumn, Swiss banks launched
covered warrants in Swiss registered shares in a bid to give
foreign investors a chance to play in a market otherwise closed
to all but Swiss citizens, and to play it with higher leverage.
    But after a quick flurry of issues, that market dried up
when Swiss shares prices fell from their January peaks.
    The issues are being marketed not on the basis of simple
premiums, but on implicit volatility models devised to provide
scientific comparisons between titles in the options market.
    Martin Bachem of Morgan Guaranty said his bank's issue was
competitive despite its relatively high premium. The issue, for
five ounces at 425 dlrs, was priced at 955 Swiss francs, making
a premium over the spot gold price of nearly 36 pct.
    Using a Black Sholes options model, he said the issue's
long, 4.3-year maturity meant the warrants needed an implicit
volatility of gold of only 24.5 pct for the option to pay off,
which he claimed was lower than the other issues.
    But Barrett said the Black Sholes variant Citicorp used
pointed to a higher volatily for the Morgan issue and
emphasized that the models were at best an inexact science.
    And each bank, using its own model, put the implicit
volatility needed for its own issue at close to 25 pct.
    Whatever the calculation, the issues have received a warm
welcome from investors.
    Joensson of Goldman Sachs said there was a lot of demand,
even among small investors, who were buying 15 or 20 warrants
apiece. "The most sophisticated ones wouldn't buy these because
the premiums are too high," he said.
 REUTER
