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SCMP Reporter

THE volatility of the US dollar against the yen is prompting investors to dabble in the currency market.

  With a sleeping property market and equities only recently showing an improvement, an investment with limited risk but potentially high profits is being warmly embraced by investors, according to foreign exchange traders.

  Swiss Bank Corp (SBC) associate director of foreign exchange sales Claire Leaman said the bank's introduction of unlimited currency warrants on July 12 for investments as small as $10,000 had attracted a 'very good response'.

  However, SBC knew from a similar effort in Frankfurt that growth was a matter of time and education. In four years, the Frankfurt issue has grown to 300 outstanding warrants, and has since become one of Europe's largest issuers of currency warrants.

  Ms Leaman said purchasing a warrant turned the complex currency market into a straightforward investment vehicle.

  The product is a contract which permits the owner, depending on the contract held, to buy or sell a currency at a fixed price within a specified period.

  Historically, many Hong Kong investors have taken a beating in the currency market at the hands of disreputable forex trading houses.

  As investors now know, direct investment into a currency, or leveraged forex buying, can mean huge loses - and quickly.

  Leveraged buying means purchasing a foreign currency account, or float, for as little as 2.5 per cent down; if there is a change in the market and the float dwindles, the investor must top up the account or lose the entire investment.

  The Securities and Futures Commission implemented new regulations recently, after complaints were lodged against smaller trading houses for fraud, abusing discretionary authority and playing the market against the investor.

  Now, forex companies must meet minimum capital and liquidity requirements to ensure that licensed traders have adequate resources to cover the risks involved.

  Interbank traders say the controversy means that cautious investors will continue to turn to retail banks and well-known financial institutions to play the market. Traders estimate that the forex market in Hong Kong has grown 20 per cent over the past few years.

  With a call warrant, the investor pays a premium for the right to buy one of five different currencies (Canadian dollar, Swiss franc, Australian dollar, German mark, Japanese yen) at a fixed dollar price, for a limited period of time - in SBC's case five or nine months. Premiums vary, but most are $5 to $25 per US$100 (HK$772) warrant.

  For example, an investor may buy a call option, which allows him to buy 100 yen for US$1 (or a strike price to sell a dollar for 100 yen) at a premium of $22 per warrant.

  When the yen is trading at 95 to the dollar, then the profit, if the warrant is exercised, would be five yen per warrant minus the value of the premium paid. If the yen depreciates to 105, SBC will, it says, redeem the warrant from the investor at any time before the expiry date. The investor will lose money, but not more than he originally paid for the warrant.

  A put option or warrant works in reverse, enabling the holder of the option to sell a yen for a fixed dollar strike price. Investors expecting the yen to depreciate against the dollar buy puts.

  For example, investors who own property in Canada, for example, might choose to hedge by buying a put in Canadian dollars. If the dollar falls, their property investment would lose money; they protect themselves by exercising a put option and making a profit to offset that loss.

  Some investors like to straddle the market by buying put and call warrants because they want to capitalise on the market if the currency rises or falls. Straddling gives them the right to buy or sell the currency; profit here depends on whether the currency gain or loss outstrips the premium paid for both options.

  'Investors have a broad range of views. Some want to trade, others want to hedge,' Ms Leaman said. 'And at the moment, the most interest is in the US dollar-yen market, because it has been so volatile.'   So far, the bank has released 24 different calls and puts in the US dollar. She said the bank planned to release more, as the changing market would demand relevant call and put prices in relation to the fluctuating currencies.



HK investors warming to currencies