ZA-OSKSB could yield 8.0% return for less than 2 months' holding

ZA-OSKSB is a cash-settled zero-strike basket call warrant (“Basket CW”) that gives the holder an exposure to a basket of 20 blue chip shares. The issuer, OSK has recently modified the mode of exercise of the Basket CW from a cash-settled European style of exercise to a cash-settled Bermudan style of exercise. After the modification, the Basket CW can be exercised on 4 days in a year as compared to being exercisable only on its expiry date. The Exercise Dates of the Basket CW shall be 28th February, 29th May, 29th August and 29th November of each year, and the last Exercise Date shall be the Expiry Date.

The effect of this modification is the exercise of 17,200,000 units of the Basket CW on the first Exercise Date on 29^th November 2006. As a result thereof, the outstanding Basket CW is 3,300,000.

The next Exercise Date will be on 28th February, which is about 50 days away. If you buy ZA-OSKSB at yesterday’s closing price of RM1.08 & exercise it on 28th February, you are likely to get at least capital gain of 8.0%, assuming the component stocks in the basket can maintain at yesterday’s closing prices. As at yesterday, the underlying value of each ZA-OSKSB is RM1.1735 (see the table below) while being traded at only RM1.08. Given the current bullish sentiment in the stock market, I would rate the chances of ZA-OSKSB maintaining its underlying value at RM1.1735 to be very good. In fact, I would not be surprise if the underlying value could be higher than RM1.1735 on the Exercise Date of 28th February.