Hold Till Maturity?

Received an email from Celine Weng-Tse Chung, who asked the following questions:

1) By holding the covered warrants(cw) to maturity, rather than flogging them - what is the mentioned
full bang benefit?

2) I appreciate that by buying cw we have the rights but not obligations to exercise our rights. In the case of say, the 1st of your Top Buy pick, CCCC-C1 - upon maturity, should the investor decided to exercise his rights, herein what do the investor "buy" ?

Reply - Reasons why I suggested to hold these covered warrants till maturity are:

a) I think the China A-shares and H-shares have more upside from current levels come December 2007 and April 2008.

b) The biggest worry on any kind of warrants is the depreciating "time value" and the corressponding premium it NEEDS to work off before becoming profitable. However, if you look at the recommended covered warrants, the premium are usually less than 10%. That is cheap to me esp after you factor in the leverage of btw 4x-10x. With that kind of gearing, it is very easy to work down the premium and be "in the money". Which is why, by holding to maturity, I expect many of these to be "in the money" come November.

c) The danger in holding warrants till maturity is the level of "out of money", or the premium it commands as the maturity date gets closer. If you are still out of the money with less than 1 month, the price of the warrant goes very quickly to 1 sen and then zilch, you lose everything. As I expect most of the recommended covereds to be in the money come November, there is a huge comfort level in buying and enjoying the ride till maturity.

Just imagine you are now holding HKEX-C3, the exercise px is HKD133.88 and the current share price is already above HKD200, plus you still get a gearing of 5x. Its great esp if you got the C3 below RM1.50 as the C3 is at RM2.20. Come maturity in April 2008, if the price of HKEX reaches HKD240, can you imagine the price of the C3 come March 2008. Another great example is holding China Mobile-C3.

d) Upon maturity, you will get the difference between the exercise price and closing market price of the mother share, after taking into account the various currency translations and commissions.

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