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Foreign Play: A Danish Wager On Tokyo's Market

By Michael R. Sesit. Wall Street Journal, Eastern edition [New York, N.Y] 21 Dec
1989: 1.

Abstract (summary)
The Scandinavian country filed with the Securities and Exchange Commission for permission to issue
warrants that entitle holders to receive cash if the Nikkei index of 225 major stocks listed on the Tokyo
Stock Exchange drops below a predetermined level over the next three years.
The warrants, developed by Goldman, Sachs & Co., are designed for individual investors as well as
professional money managers. Goldman Sachs executives noted that PaineWebber Inc. and Sears,
Roebuck & Co.'s Dean Witter Reynolds Inc. unit -- two securities companies with large retail operations -are helping sell the issue. Also, the warrants will be listed on the American Stock Exchange, pending SEC
approval.
Why is Denmark issuing these securities to bet against Japanese stocks? "The Kingdom of Denmark isn't
taking a view one way or another," said David Stowell, a vice president at Goldman Sachs. The firm
approached several potential issuers, and "the Kingdom of Denmark was simply the most facile and
recognized the advantages of the arbitrage."

Full Text
The Kingdom of Denmark cordially offers you a chance to bet against the Japanese stock market.
The Scandinavian country filed with the Securities and Exchange Commission for permission to issue
warrants that entitle holders to receive cash if the Nikkei index of 225 major stocks listed on the Tokyo
Stock Exchange drops below a predetermined level over the next three years.
The Japanese stock market has been soaring for several years-the Nikkei index is up 28% this year alonedefying many analysts' perennial predictions of a decline.
The warrants, developed by Goldman, Sachs & Co., are designed for individual investors as well as
professional money managers. Goldman Sachs executives noted that PaineWebber Inc. and Sears,
Roebuck & Co.'s Dean Witter Reynolds Inc. unit -- two securities companies with large retail operations -are helping sell the issue. Also, the warrants will be listed on the American Stock Exchange, pending SEC
approval.
Like an option, a warrant gives its holder the right, but not the obligation, to sell or purchase a security,
currency or, in this case, the cash equivalent of a market index at a specific price on or before a specific
date.

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Page 2 of 3

The Danish warrants could be useful to speculators who wanted to bet that the high-flying Tokyo market is
due for a tumble. They might also appeal to investors who want to hedge their existing portfolio of
Japanese stocks. In addition, the instrument could appeal to stock investors anywhere on the globe who
might want to use it as a hedge because they believe that all equity markets are linked around the world.
Money managers predicted that the success of the Danish warrants would depend largely on the offering
price. Market sources estimated that each warrant would be priced between $4.50 and $6.50, which is the
maximum price listed in the registration documents.
Why is Denmark issuing these securities to bet against Japanese stocks? "The Kingdom of Denmark isn't
taking a view one way or another," said David Stowell, a vice president at Goldman Sachs. The firm
approached several potential issuers, and "the Kingdom of Denmark was simply the most facile and
recognized the advantages of the arbitrage."
Goldman, Sachs explained that Denmark itself isn't assuming any risk in issuing the warrants because the
firm had arranged for the country to be fully hedged with an almost identical product at a slightly lower
price. "They are simply getting an arbitrage benefit," Mr. Stowell said.
The warrants would work like this: The price at which they can be exercised -- the so-called strike price -will be the level of the Nikkei 225 index on the offering date, which Goldman, Sachs hopes will be in
January. If the index falls below this level, the warrants can be exercised -- in lots of 500 or more -- by
selling them back to Denmark at any time prior to their expiration three years later. Alternatively, they can
also be sold on the Amex.
In return for exercising them, the holder receives the dollar-equivalent of one-fifth of the Nikkei index,
which is calculated in yen. The dollar-yen exchange rate will be the same as that on the date of the
offering. That way, the investor is protected from any currency loss, should the dollar increase in value
between the offering date and the time the warrants are exercised. Of course, the investor is also giving up
an opportunity for currency gain if the yen were to appreciate against the dollar, thus making the Nikkei
index worth more dollars.
And if the Nikkei index remains above its level on the offering date, the warrants are worthless.
Betting against the Japanese stock market can be risky business. The Nikkei 225 Index closed Wednesday
at 38512, not far below its record high.
Nevertheless, U.S. money managers for years have been predicting the Japanese market would plunge.
With stock prices on that market averaging about 55 times their companies' per-share earnings, compared
with 12.5 in the U.S., they argue that the Japanese market is outrageously overvalued.
An instrument that allows investors to hedge their Japanese stock holdings "is something we'd look at
carefully; the basic concept is one that people will increasingly find useful," said Barry Gillman, managing
director at PCM International, a unit of the Prudential Insurance Co. of America in Newark, N.J. But he
added that professional money managers might prefer more customized products.
Told of the Denmark warrant, Christian Wignall, senior vice president in charge of international investment
at GT Capital Management Inc. in San Francisco, said: "Good luck to them." He added: "I don't know
anyone who has made money trying to short the Japanese market. I know a lot of people who lost a lot of
money trying."

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Page 3 of 3

While not unique, the Danish warrants would be the first to be listed on a U.S. exchange. The warrant can't
be sold to or exercised by Japanese investors or any company controlled by a Japanese concern. Similar
products have been offered in Canada and Europe, but they aren't registered with the SEC.
In Japan, there is an option contract on the Nikkei 225 and one on the Tokyo Stock Exchange's own index,
Topix, as well as futures contracts on both. However, neither is sanctioned by U.S. regulatory authorities,
and the instruments can only be sold outside the U.S. Singapore also has a futures contract based on the
Nikkei index, but Japanese brokers said it isn't actively traded.
Credit: Staff Reporter of The Wall Street Journal
Copyright Dow Jones & Company Inc Dec 21, 1989

Indexing (details)
Title

Foreign Play: A Danish Wager On Tokyo's Market

Author

By Michael R. Sesit

Publication title

Wall Street Journal, Eastern edition

Pages

Number of pages

Publication year

1989

Publication date

Dec 21, 1989

Year

1989

Publisher

Dow Jones & Company Inc

Place of publication

New York, N.Y.

Country of publication

United States

Publication subject

Business And Economics--Banking And Finance

ISSN

00999660

Source type

Newspapers

Language of publication

English

Document type

NEWSPAPER

ProQuest document ID

398145752

Document URL

http://search.proquest.com/docview/398145752?
accountid=38148

Copyright

Copyright Dow Jones & Company Inc Dec 21, 1989

Last updated

2010-06-26

Database

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