CIMB Warrants Inv Roadshow 251106 CIMB

Click to edit Master title style

Click to edit Master subtitle styleNovember 2006

Key Concepts, Features And Myths Of Structured Warrants


Click to edit Master subtitle styleCONTENTS

Contents Section 1 Executive Summary 1

Section 2 Structured Warrants Programme in Malaysia 2

Section 3 Key Features of Call Warrants 3 - 5

Section 4 The Six Myths of Call Warrants 6 - 9

Section 5 Behavior of Call Warrants 10 - 11

Section 6 Why Buy Call Warrants? 12 - 13

Section 7 How to Choose a Call Warrant? 14

Important Notice

Contact Details


Click to edit Master subtitle styleSection 1

EXECUTIVE SUMMARY

Executive SummaryTo be Malaysia’s first warrants supermarket that offers a wide range of listed Call Warrants featuring major sectors, themes and single stock.

To provide investors with alternative trading instruments to enhance returns with limited downside risks.

To develop and broaden the product range via other equity derivative such as Over-the-Counter (“OTC”) options, Bull Equity-Linked Investment (“Bull ELI”) and High Yield Equity-Linked Investment (“HY ELI”).

To offer call warrants on foreign underlying companies and indices.

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STRUCTURED WARRANTS PROGRAMME IN MALAYSIA

Structured Warrants Programme in Malaysia

To kick start the structured warrants programme, CIMB Investment Bank Berhad (formerly known as Commerce International Merchant Bankers Berhad) (“CIMB”) launched the base prospectus in April 2006.

The base prospectus is valid for one year and each structured warrant offering will be accompanied by a term sheet.

To date, CIMB has successfully launched 19 series of cash and physically-settled call warrants.

On 31 October 2006, the SC issued a revised and enhanced Structured Warrants Guideline which allows the issuance of structural warrant products on foreign underlying listed shares and indices.

CIMB aims to take full advantage of the enhanced guidelines to further develop the structured warrants market and build greater market liquidity.

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Section 3

KEY FEATURES OF CALL WARRANTS

Key Features of Call Warrants Issued in Malaysia

KEY FEATURES DESCRIPTION

Call Warrants

• Cash settlement: Investors will receive payoff amount of maximum (0, Closing Price –Exercise Price) x 1 / Exercise Ratio

• Physical settlement: Investors will receive shares upon payment of the Exercise Price

On Expiration • Previous day closing price if warrant holders exercise before 9.00 am

• Volume weighted average market price (“VWAMP”) for 5 market days prior to Expiry Date

Exercise Price • Set as a percentage of one day VWAMP

Exercise Styles• American: Right to exercise at any time before or on Expiry Date

• European: Right to exercise on Expiry Date

On Expiration• Automatic exercise for in-the-money cash-settled call warrants

• Automatic termination for in-the-money physical-settled call warrants

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Key Features of Call Warrants Issued in Malaysia (Cont’d)

KEY FEATURES DESCRIPTION

Exercise Ratio

• One call warrant for one share

• Ten call warrants for one share

• Such other ratio as approved by the SC

Premium • [(Call warrant price x Exercise Ratio) + Exercise Price – Underlying Security Price)]Underlying Security Price

Delta • Change in the call warrant price x Exercise RatioChange in the Underlying Security Price

Guarantor • CIMB Bank Berhad (formerly known as Bumiputra-Commerce Bank Berhad (“CIMB Bank”) will guarantee CIMB’s obligation to warrant holders

Gearing • Underlying Security Price _(Call warrant price x Exercise Ratio)

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Key Features of Call Warrants Issued in Malaysia (Cont’d)

Event Days1 2 3 4 5 6 7 8 9

Launching of Term Sheets; Notif ication to all Selling Agents

Offer closes at 3.30 pm; Allocation at 4.30 pm; Issuance of Placement Letters

Selling Agents to remit payment to CIMB

Submission of MCD Tape

Submission to SC on List of Placees

New spaper advertisement on f inal issue price, exercise price & stock codes

Listing of Call Warrants

5



THE SIX MYTHS OF CALL WARRANTS

The Six Myths of Call Warrants

MYTH COMMENTS

MYTH # 1Zero Sum Game - Third-party call warrant issuers make money out of warrant investors

• This perception is wrong. When a warrant issuer issues call warrants, the warrant issuer needs to buy underlying shares to hedge the short warrant position at the inception of the call warrant issue. To achieve a delta neutral position, the warrant issuer employs various hedging strategies including a strategy to continuously hedge the short call warrant position by (a) buying more underlying shares if underlying share price goes up, or (b) selling existing underlying shares if the underlying share price goes down.

• If a warrant issuer does not hedge the short call warrant position, the warrant issuer will be exposed to unlimited loss caused by rising underlying share price.

• SC and BNM require warrant issuers to have a comprehensive risk management framework for hedging warrants issued.

MYTH # 2A warrant issuer hopes that the underlying share price goes down so that it can earn the entire issue price

• A third-party warrant issuer like CIMB does not take any view on the direction of the underlying share price. Instead, a warrant issuer seeks to achieve neutral position in the option Greeks or risk variables such as delta, gamma, vega, theta, and rho.

• CIMB does not earn the entire issue price. The issue price is used for funding the initial purchase of underlying shares, the subsequent delta hedging activities and listing expenses. As an issuer, CIMB provides an alternative trading instrument which limits the downside risk while retaining the upside potential.

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The Six Myths of Call Warrants (Cont’d)

MYTH COMMENTS

MYTH # 3A warrant issuer issues call warrants with the hope to dispose shares

• A third-party warrant issuer like CIMB buys underlying shares to hedge its position at inception. CIMB will only dispose underlying shares it bought at the inception of the call warrant issue as and when (a) underlying share price goes down, or (b) a call warrant holder exercises a cash-settled call warrant. On the latter, CIMB will need to dispose the underlying share to pay the call warrant holder.

• Cash Settlement Amount = maximum (0, Closing Price–Exercise Price) x 1 / Exercise Ratio.

MYTH # 4You can trade call warrants indefinitely

• All call warrants have definite life. Call warrant holders are advised to consult their dealers on the maturity date of the call warrant.

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MYTH COMMENTS

MYTH # 5A warrant issuer issues warrants at higher exercise price so that the warrant issuer can cash out at higher price

• This is really a trade off between the exercise price and the issue price. If the issuer issues a higher exercise price, the issue price of the call warrant will be lower and vice-versa. So, a warrant issuer issues warrants based on investors’ preference during the launch period.

Example:

Warrant Warrant Price(as at November 3, 2006)

Strike Price Share Price(as at November 3, 2006)

Tenaga – CA RM 2.220 RM 7.96

Tenaga – CB RM 0.745 RM 9.08

Tenaga - CC RM 0.375 RM 10.00

RM 10.10

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MYTH COMMENTS

MYTH # 6Call warrant is an illiquid instrument. You can’t liquidate once you buy Call Warrant

• Warrants with designated market makers are liquid. Warrant issuers are required to market make their warrants.

Closing Price

Counter Average Volume 2 October 2006 9 November 2006 UP/DOWN

Bursa Malaysia 1,341,308 5.750 6.850 19.13%

Bursa-CA 1,341,350 0.340 0.460 35.29%

Genting 1,162,119 23.900 26.250 9.83%

Genting-CA 7,900,635 0.220 0.350 59.09%

IOI CORP 1,662,558 16.400 18.400 12.20%

IOI-CA 457,208 0.370 0.710 91.89%

Gamuda 1,764,923 3.980 4.600 15.58%

Gamuda-CC 613,981 0.300 0.475 58.33%

Resorts 1,766,931 11.100 12.100 9.01%

Resorts-CA 1,473,541 0.455 0.460 1.10%

Tenaga 7,999,635 9.650 10.400 7.77%

Tenaga-CB 454,238 0.650 0.865 33.08%

Tenaga-CC 146,929 0.450 0.475 5.56%

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BEHAVIOUR OF CALL WARRANTS

Behavior of Call Warrants

Intrinsic value

Time value

Exercise Price

Call WarrantPrice

Theoretical Call Warrant Price

Call Warrant Price at Maturity

Underlying Share Price

1 2 3 4 5 6 7 8 9 Underlying share price (RM) 8.00 8.50 9.00 9.50 10.00 10.50 11.00 11.50 12.00 Exercise Price (RM) 9.08 9.08 9.08 9.08 9.08 9.08 9.08 9.08 9.08 Theoretical call warrant price (RM) 0.24 0.35 0.49 0.66 0.84 1.04 1.26 1.48 1.71

Conversion ratio (warrants/share) 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 Call warrant price (RM) x conversion ratio 0.47 0.71 0.99 1.32 1.69 2.09 2.52 2.96 3.43 Instrinsic Value (RM) - - - 0.42 0.92 1.42 1.92 2.42 2.92 Time Value (RM) 0.47 0.71 0.99 0.90 0.77 0.67 0.60 0.54 0.51

Gearing (times) 16.86 12.04 9.10 7.21 5.93 5.03 4.37 3.88 3.50 Premium 19.4% 15.1% 11.9% 9.4% 7.7% 6.4% 5.4% 4.7% 4.2%

* Theoretical call warrant price is based on CIMB's assumption as of June 28, 2006.

Scenario

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Behavior of Call Warrants (Cont’d)

Intrinsic value

Time value

Call WarrantPrice

Intrinsic value

Call WarrantPrice

Call Warrant Price

at Maturity


Theoretical call warrant price decays and moves to intrinsic

value as time goes to maturity

Call Warrant Price

at Maturity




Exercise Price

Exercise Price

Sensitivity FactorsImpact on CallWarrant's price

Underlying Value

Volatility

Maturity

Interest rate

Dividend

11



WHY BUY CALL WARRANTS?

Why Buy Call Warrants?

REASON

Leverage Play

Gearing of 4 to 12 times. CIMB is the liquidity provider for all its call warrants issues

Unlimited Upside & Limited Downside The maximum loss = Price of the call warrant the investor purchase

= A fraction of underlying security price

Magnum (3735) Magnum CW (3735CA)

Share Price

Change Price Change

(a) (b) (c) (d) (a) / (c) (d) / (b)

6-Nov-06 RM 2.21 - 0.240 - 9.21x -

7-Nov-06 RM 2.21 0% 0.255 6.25% 8.67x 6.25x

GearingReturn of

Magnum-CA to Magnumi

Date

12

Why Buy Call Warrants?

REASON

Better Alternative than Share Margin Financing

• No margin call

• No processing fee, rollover fee, etc

• Limited downside risk

• No collateral required

• Substantially higher leverage

Low Transaction Costs Less brokerage and opportunity cost of capital

Liquidity CIMB is the liquidity provider for all its call warrants issues. Subject to certain market condition, CIMB will provide a two-way market for its call warrants issues during the tenure of the warrants

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HOW TO CHOOSE CALL WARRANTS?

How to Choose Call Warrants?

Pick your underlying

The performance of warrant is tagged closely to the price performance of the underlying security. Investors should research the outlook of the underlying security and determine the target underlying security price within investment period.

Generally, investors should only buy a call warrant if they are bullish on the underlying share.

Select the best warrants

Every warrant is unique i.e. different Exercise Price, Expiry Date, etc. Investors should compare features of various call warrants of the same underlying security. The features are Effective Gearing, Premium, time to expiry, etc.

Risk assessment

Investors should understand the dynamics of how the product works, the associated risks, and their risk tolerance before buying any product.

Warrants liquidity

Most warrants are illiquid. Pick warrants with a good liquidity provider

Step 1 Step 2 Step 3 Step 4

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Click to edit Master subtitle styleIMPORTANT NOTICE

Important NoticeThis document has been prepared by CIMB Investment Bank Berhad (formerly known as Commerce International Merchant Bankers Berhad) (“CIMB”) solely for use at the product briefing. This document may not be copied, distributed, reproduced or otherwise disseminated to any other person, or published in whole or in part for any purpose, without the written consent of CIMB.

This presentation has been prepared on the basis of information that is believed to be correct at the time the presentation was prepared, which has not been independently verified. No representation or warranty express or implied is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of such information or opinions contained herein. Neither CIMB nor any of its affiliates, advisers, employees, agents or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document.

This document does not constitute an offer or invitation to purchase or subscribe for any securities of CIMB and no part of it shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. Any decision to purchase securities in an offering should be made solely on the basis of the information contained in the Base Prospectus and relevant Term Sheet prepared in connection with the offering.


Click to edit Master subtitle styleCONTACT INFORMATION

Team – Equity Derivatives Unit

Charon Wardini MokhzaniDeputy Chief Executive

CIMB Group

Dato’ Nazir Razak Group Chief Executive

CIMB Group

Senior Leadership

Core Team

EQUITY DERIVATIVES UNITEQUITY MARKETS & DERIVATIVES

Dato’ Robert CheimAdvisor

Lim Jong HauDirector

Larry Ch’ngAssistant Director

Adilah Abdullah BaharuddinManager

Eunice SawAssistant Manager

Murni AzmiAssociate

Contact Information

For enquiries, please contact:

Larry Ch’ngAssistant DirectorEquity Derivatives UnitT: (60) 3 2084 9942F: (60) 3 2093 6098 E: larry.ch’[email protected]

Eunice SawAssistant Manager

Adilah Abdullah BaharuddinManagerEquity Derivatives UnitT: (60) 3 2084 9942F: (60) 3 2093 6098E: [email protected]

Murni AzmiAssociateEquity Derivatives UnitT: (60) 3 2084 9942F: (60) 3 2093 6098 E: [email protected]

Equity Derivatives UnitT: (60) 3 2084 9942F: (60) 3 2093 6098 E: [email protected]

Documents

CIMB Warrants Inv Roadshow 251106 CIMB