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An introductory guide

WARRANTS &

CERTIFICATES2002


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CONTENTS01. WHAT ARE WARRANTS

& CERTIFICATES? 02Warrants 03

Certificates 03

02. WHY CONSIDER WARRANTS& CERTIFICATES? 04Global product range 05

Sterling denominated, locally traded 05No stamp duty 05

Enables multiple investment strategies 05

Regulated, liquid and transparent market 05

Limited liability 05

03. HOW CAN WARRANTS& CERTIFICATES BE USED? 06Leveraged investing 08

Hedging a position or portfolio with warrants 09

Extracting cash 10

Diversification using certificates 10

Asset allocation 10

Trading warrants 11

04. HOW ARE WARRANTS PRICED? 12Intrinsic value 13

Time value 14

Factors determining a warrant price 15

Underlying asset price 16

Strike price 16

Time to expiry 16

Volatility 16

Risk-free rate of interest 17

Dividend expectations 17

05. HOW DO WARRANTS &CERTIFICATES DIFFER FROM OTHERUK INVESTMENT PRODUCTS? 18

06. WHY GOLDMAN SACHS? 21Goldman Sachs at a glance 23

07. WARRANTS AND CERTIFICATESGLOSSARY 24


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02

01.WHAT AREWARRANTS &CERTIFICATES?Warrants

Certificates


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WHAT ARE WARRANTS AND CERTIFICATES?

The London Stock Exchange has launched a new

range of products for UK investors warrants and

certificates. For years these products have been

widely popular in continental European markets

due to their high return potential and their ability

to offer positive returns in both rising and falling

markets. Available in the UK for the first time,

following their release in autumn 2002, these new

securities could play a significant role in UK

investment portfolios.

The following pages offer an introduction towarrants and certificates, outlining some key stra-

tegies, both speculative and defensive, as well as

discussing the main features of the product range

and comparing them to existing UK investment

products.

Warrants

Warrants are securities that are listed on stock

exchanges. They can be thought of as a form of

derivative that give investors the opportunity to

gain leverage in other words earn potentially

higher returns than they could do through direct

share ownership.

This leverage effect also increases the risk of the

product, but in contrast to some vehicles (such as

Futures, CFDs and spread-betting) investors

cannot lose more than their original investment.

A warrant gives an investor the right but not the

obligation to buy (known as a call warrant) or

sell (known as a put warrant) a specified under-

lying asset at a particular price (known as the

strike price) within a specified timeframe (known

as the maturity). For example, a Vodafone 1.50

Dec-04 Call Warrant would give an investor the

right to buy Vodafone shares at 1.50 during the

period up to and including December 2004.

The vast majority of warrants are cash settled,

meaning that investors receive the cash profit on

their position if they exercise their warrants rather

than the underlying asset. LSE listed warrants will

settle electronically within Crest. The UK Inland

Revenue has confirmed that investors in such

warrants do not have to pay UK stamp duty or

stamp duty reserve tax (currently 0.5% on UK

share purchases) on warrant trades.

In the UK, there are warrants available on a wide

range of UK and International blue-chip and mid-cap shares and indices (such as BP, Nokia, FTSE

100 and Nasdaq 100). All of these warrants are

traded in sterling.

The popularity of these products in other markets

particularly Germany, Italy and Switzerland

stems from the fact that they can be used to reflect

either a positive or negative view on a share or

index, or alternatively to hedge (reduce the risk

of) a larger portfolio of investments. This makes

them especially attractive in times of high market

uncertainty.

Certificates

A warrant which has no leverage is often referred

to as a Certificate. The price of this type of warrant

tracks the performance of the underlying asset

directly and as such offers a much lower risk

investment. They give investors a cost efficient

means to trade a share or to diversify their expo-

sure across an index or sector.

A FTSE 100 certificate for example would enable

an investor to buy a security whose return over

time will track that of the FTSE 100 index. This is

often a more cost efficient method than buying all

the constituent shares of the index or buying into a

pooled investment such as a tracker fund.

03


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02.WHY CONSIDERWARRANTS &CERTIFICATES?Global product range

Sterling denominated, locally traded

No stamp duty

Enables multiple investment strategiesRegulated, liquid and transparent market

Limited liability


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Global product range

Warrants and certificates give investors the ability

to trade the global financial markets we have

products based on UK, European, US and Japanese

stocks, sectors and indices.

Sterling denominated,

locally traded

Goldman Sachs products listed on the London

Stock Exchange are traded in sterling. Just as for

share trading, warrants will trade electronically and

will be available through on-line and traditionalstockbrokers across the UK. The transaction is

paperless with no exchange of physical certificates.

No stamp duty

The vast majority of warrants are cash settled,

meaning that investors receive the cash profit on

their position if they exercise their warrants rather

than the underlying asset. LSE listed warrants

will settle electronically within Crest. The Inland

Revenue has confirmed that investors in such

warrants do not have to pay stamp duty or stamp

duty reserve tax (currently 0.5% on UK share

purchases) on warrant trades.

Enables multiple investment

strategiesWarrants and certificates give investors the oppor-

tunity to execute a number of different investment

strategies not easily achieved with traditional share

investing. Some of these involve increasing or

reducing the risk of a given position. Others focus

on cost-efficiency or tax reduction. The most

common strategies are Leveraged Investment,

Hedging, Diversification, Cash Extraction and

Asset Allocation. These are explored in more

depth in Section three.

Regulated, liquid

and transparent market

Our activities are regulated by the Financial

Services Authority and our products are listed on

the London Stock Exchange. Goldman Sachs guar-

antees liquidity in its products, meaning, in normal

market conditions, we will always be present

during the trading day with competitive spreads to

buy or sell your security. Goldman Sachs warrants

are available in units in the 1 range, making

access to markets easier than with many other

investment products.

Limited liability

With warrants and certificates you can never lose

more than your initial investment, known as the

premium.

WHY CONSIDER WARRANTS & CERTIFICATES?

05


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HOW CANWARRANTS &CERTIFICATES BE USED?Using warrants for leveraged investing

Hedging a position or portfolio

Extracting cash

Diversification using certificatesAsset allocation

Trading warrants

03.


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07

HOW CAN WARRANTS & CERTIFICATES BE USED?

Warrants and certificates can be used to execute a

wide range of investment strategies. However,

before discussing any of these in detail it is impor-

tant to highlight the common questions that

investors should ask themselves before entering

into a trade:

What am I trying to achieve? If for

example investors are looking for leverage, they

should have a strong view on the future perform-

ance of the share or index in question.

What is my risk appetite? A wide

range of leveraged investment opportunities are

available to warrant and certificate investors (for

an explanation of leverage, please see page 8).

Warrants generally offer investors higher poten-

tial returns at a higher risk, while certificates

offer a much lower risk profile. Investors should

review their objectives and select a product based

both on their expected returns and their appetite

for risk.

What is the time horizon of my

strategy? There are two variables to bear in

mind: (i) the longer the maturity of a warrant the

more expensive it becomes and (ii) the closer the

warrant gets to expiry the greater its daily loss in

value.

Which is the cheapest warrant to

execute my strategy? If there is a

range of warrants available whose characteristics

match an investors needs, the selection process is

likely to be driven by price. Investors can selectthe cheapest warrant by trading the product with

the tightest spread (the difference between the

buy and sell price) and the lowest implied

volatility.

A number of the most common warrant and certi-

ficate strategies are detailed in the following pages.


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08

Using warrants for leveraged

investing

If you feel that a specific companys shares will rise,

you can make a small investment in call warrants,

as an alternative to direct investment in the equities

themselves.

On the other hand, if you think a particular index

is likely to fall, you could buy put warrants on that

index, allowing you to benefit if your analysis is

right and the index declines.

In both cases, the key distinguishing factor with

warrants is that they give you leverage. They allow

you to gain considerable exposure to an underlying

equity with a much smaller investment the

premium than would otherwise be required.

As such, the return from a warrant investment is

higher in percentage terms than that of the under-

lying asset if the investors view was correct. Con-

versely, if the investor was wrong then the warrant

will underperform the underlying asset. Warrants

effectively offer investors the chance of higher

returns at a higher risk.

A range of leverage is available different warrantshave different degrees of leverage, depending on

their characteristics. Among the factors that can

influence a warrants degree of leverage are the

time to maturity, the volatility of the underlying

stock, and the strike price. For a complete explana-

tion of the role these factors play, please refer to

section four.

On the 1st November 2001 investor A believes that Vodafone shares will rise over

the next few weeks from their current price of 1.59 to the 1.80 2.00 range

He could invest directly in Vodafone stock- with the following result

Alternatively, the investor could invest in a Vodafone warrant which would offerpotentially higher relative returns at a commensurately higher risk

STRATEGIES LEVERAGED INVESTMENT

BUY Vodafone Stock

@ 1.59

1st November 2001

SELL Vodafone Stock

@ 1.89

19th November 2001

BUY Vodafone 1.75

Call Warrant @ 0.203

SELL Vodafone 1.75

Call Warrant @ 0.392

+19%

or

+93%

GS Vodafone warrant in this example has a 1 yr maturity, a 1.75 strike and a 1 for 1 ratio

Note these calculations exclude transaction costs.

Prices are based on actual historical data.

Call

Put


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09

Hedging a position or portfolio

with warrants

If you expect share prices to fall, but do not want

to sell existing shares, you can buy put warrants to

hedge your portfolio against price declines. At the

same time, you can continue to participate on the

upside if share prices do rise.

Assuming that the mix of shares in your portfolio

reflects the composition of the FTSE index, you can

hedge against a possible share price decline by the

one-off acquisition of put warrants on the FTSE.

A hedging position can be thought of as a form of

market insurance where investors pay a premiumto protect themselves from market falls.

Asset allocation with warrants

and certificates

The Goldman Sachs warrant and certificate range

gives investors the ability to trade the global finan-

cial markets. As a result, investors are able to

apportion their exposure among a broad range of

equity markets and sectors.

On the 17th May 2002 investor B holds a portfolio of US Tech stocks. He is

concerned that the market may fall over the next month and he wants to insure his

portfolio against such an event

He can use warrants to do this by buying a Nasdaq put warrant which will rise as the

market falls and will leave the return of his total portfolio flat

STRATEGIES HEDGING A POSITION OR PORTFOLIO

US Tech Portfolio

10,000

17th May 2002

US Tech Portfolio

8,802

17th June 2002

Total Portfolio

10,910

Total Portfolio

10,882

12%

+/ 0%

Nasdaq Put Warrant

910

Nasdaq Put Warrant

2,080+129%

GS Nasdaq 100 warrant in this example has a 6 month maturity and a 1,200 strike

Assumes portfolio returns the same as the Nasdaq 100 Prices are based on actual historical data.

+

+

+

Shares

Put

HedgedPosition


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10

Extracting cash with warrants

If you want to use the capital you have tied up in

an investment without relinquishing your original

position, warrants can help. In this case, you sell

the underlying asset and, using a fraction of that

sum, buy call warrants to replicate the original

position. In this way, you can still participate in

any future upside gains in the original underlying

equity.

Diversification with index

and sector certificates

Index and sector certificates offer investors a cheap

and easy method of investing in a range of lower

risk diversified products. Our FTSE 100 certificate

tracks the performance of the FTSE 100 directly

and offers investors exposure to the performance of

the 100 largest companies in the UK. It is available

to trade all day and has none of the management

or administration fees that are sometimes con-

nected to tracker funds.

We offer other index certificates for investors

wanting to gain diversified exposure to foreignmarkets as well as sector certificates. The latter

allow diversification across markets but within one

sector (such as telecoms, financial services, tech-

nology, etc).

On the 27th November 2001 Investor C has a large position in British Airways

stock she wants to stay invested in the company but needs to free up some

capital for a down payment on a property purchase

She can use warrants to do this

Firstly: she sells her 10,000 shares in BA realising 21,750 in cash

Secondly: she buys 10,000 BA Warrants giving her the same exposure

to BA but at a lower cost (and also a higher risk) of 5,500

This strategy enables her to stay invested in BA and realise 16,250 in cash

STRATEGIES CASH EXTRACTION

Cost of warrants

to replicate exposure

5,500

Original Position in

British Airways

21,750

Cash Extracted

16,250

GS British Airways warrant in this example has a 9 month maturity, a 2.25 strike and a 1 for 1 ratio

Prices are based on actual historical data.

+

Cash

2. Buy 10,000 BAwarrants @ 55p

1. Sell 10,000BA @ 217.5p

Shares

Call


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Trading warrants

Once investors have purchased a warrant, they

have three potential courses of action:

Exercise if a warrant is in-the-money

investors may choose to exercise their rights to

buy (or sell in the case of a put) the underlying

asset and hence realise the intrinsic value of the

warrant. Because our warrants are cash-settled

investors would not receive the actual share but

rather the cash profit on their warrant (i.e. the

value of the underlying less the strike price in the

case of a call). In reality, investors very rarely

exercise warrants early because they are forfeitingany time value that the warrant may have.

They normally choose to close out instead.

All Goldman Sachs warrants are automatically

exercised on their expiry date if they are

in-the-money.

Close out investors close out positions by

selling their warrant back to the market. This is

done in order for an investor to realise both the

time value AND the intrinsic value of their war-

rant (please see section four for explanations of

time value and intrinsic value). The difference

between the purchase price and the sale price is

the profit investors have realised from their

warrant investment.

Abandonment If a warrant is worthless at

expiry an investor can abandon their position

and it will be automatically closed.


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04.HOW AREWARRANTS PRICED?

Intrinsic value

Time value

Factors determining a warrant price

Underlying asset priceStrike price

Time to expiry

Implied volatility

Risk-free rate of interest

Dividend expectations


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HOW ARE WARRANTS PRICED?

13

The price of a warrant is made up of two elements:

the warrants intrinsic value and its time value.

Intrinsic value

The intrinsic value of a warrant denotes the

amount that you could receive as a warrant-holder

if you were to exercise your right immediately.

Where the intrinsic value is zero, the entire price of

the warrant consists of time value.

For a call warrant, the intrinsic value is equal to

the amount by which the price of the underlyingasset exceeds the strike price. This should take into

consideration the warrants multiplier (the number

of warrants needed for the same exposure as

owning one share) and any currency factors. If this

value is less than or equal to zero the warrant has

no intrinsic value.

For a put warrant, the intrinsic value is equal to

the amount by which the price of the underlying

asset is below the strike price. Here, too, you take

the warrants multiplier and any currency factors

into consideration.

The example below illustrates how the relationship

between a warrants strike price and the value of

the underlying asset affects its intrinsic value.Above the strike price the intrinsic value will

increase by one point for a one-point rise in the

underlying asset.

Intrinsic value terminology

When the current price of the asset underlying the

call is higher than the strike price (or lower in the

case of a put warrant) your warrant has an

intrinsic value and is termed in-the-money. When

the current price of the underlying asset equals thestrike price, your warrant has no intrinsic value

and is termed at-the-money.

When the current price of the asset underlying a call

is lower than the strike price (or higher in the case

of a put warrant), the intrinsic value of your warrant

is also zero, this is known as out-of-the-money.

Warrants are typically more leveraged when they

are out-of-the-money than when they are in-the-money hence a one percent rise or fall in the

underlying asset will result in a more extreme move

in an out-of-the-money warrant than for an in-the-

money warrant.

EXAMPLE INTRINSIC VALUE

THE PRICE COMPONENTS OF A CALL WARRANT INTRINSIC VALUE

20

40

60

80

100

1,100 Price of theunderlying in Pence

1,0801,000

Intrinsic value in Pence

Strike price

at-the-money in-the-money

Intrinsic value = 80 Pence

out-of-the-money

900

A call warrant has a strike price of 1,000 Pence.

The conversion ratio is 1:1 and the price of the

underlying is 1,080 Pence.

Intrinsic value: 80 Pence


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Time value

The second component of a warrants price is its

time value.

In simplistic terms, time value can be thought of asa measure of uncertainty i.e. will the warrant

have any chance of having intrinsic value in the

future? All else being equal, the greater this level of

uncertainty the greater the time value of the

warrant.

Time value is at a maximum when a warrant is

at-the-money. As the warrant becomes out-of-the-

money, time value declines as it becomes increas-

ingly unlikely that the warrant will have any

intrinsic value in the future.

Similarly, as the warrant becomes in-the-money so

too its time value diminishes as it becomes increas-

ingly likely that the warrant will have intrinsic

value in the future (note although time valuediminishes in this example, the total value of the

warrant will increase due to the intrinsic value

component).

There are a number of factors that affect both the

intrinsic value and the time value of a warrant.

Together they are input into mathematical models

to calculate the price of a warrant. The next

section explores each of these factors in turn.

EXAMPLE TIME VALUE

THE PRICE COMPONENTS OF A CALL WARRANT

INTRINSIC VALUE AND TIME VALUE

20

40

60

80

100

1,100 Price of theunderlying in Pence

1,0801,000

Warrant price in Pence

Strike price

at-the-money in-the-money

Intrinsic value = 80 Pence

Time value = 20 Pence

Time value = 30 Pence

Maximumtime value = 60 Pence

out-of-the-money

900

A call warrant has a strike price of 1,000 Pence.

The conversion ratio is 1:1 and the

price of the underlying is 1,080 Pence.

Intrinsic value: 80 Pence

Time value: 20 Pence

Price of the warrant: 100 Pence

IN-THE-MONEY, AT-THE-MONEY, OUT-OF-THE-MONEY

Call Put

Price of the underlying > than the strike price in-the-money out-of-the-money

Price of the underlying = the strike price at-the-money at-the-money

Price of the underlying < than the strike price out-of-the-money in-the-money


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Factors determining a warrant price

The figure below shows the six components that

influence a warrants price this ignores the multi-

plier of the warrant and any currency factors.

Each of these components influences the price

of the warrant. They can neutralise, increase or

reduce the effect of other components. The matrix

below shows the effects of the individual determi-

nants on the price of a call and a put warrant.

Note The Sensitivity measures (or Greeks) are

used by market professionals to quantify the sensi-

tivity of a move of an individual input on a

warrants price

Underlying asset price

The performance of your warrant depends to a

large extent on the performance of the underlying

asset. A rise in the price of the asset on which your

warrant is based generally causes a rise in the price

of a call warrant. If you have a put warrant, the

opposite is true and the price of your warrant

generally falls.

Strike price

A warrants price also depends on its strike price,

which is determined at issue. The higher the strike

price relative to the underlying price, the cheaper

the call warrant or the more expensive the putwarrant will be.

WARRANT PRICING MODEL

Price of the

underlyingStrike price

Time to

expiryInterest rate

Dividend

expectations

Implied

volatility

Warrant pricing model

Warrant price

WARRANT PRICE

Delta

Theta

Vega

Rho

falls

falls

falls

falls

falls

falls

falls

falls

falls

falls

falls

falls Price of

the underlying falls

Strike pricefalls

Time to expiryfalls

Implied

volatility falls

Risk-free rate

of interest falls

Dividend

expectations falls

Determinant measure Influence on the warrant price Sensitivity measure

Call warrant Put warrant

rises rises

rises

rises

rises

rises

rises

rises

rises

rises

rises

rises rises

rises

rises

rises

rises

rises


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Time to expiry

This has a direct bearing on a warrants time value.

The more time remaining to expiry, the higher the

time value and so the higher the price of a war-

rant. This is because the longer the time period to

expiry, the wider the range of possible outcomes of

the future price of the underlying asset.

As the date of a warrants expiry draws closer, so

the time value declines. However, this does not

happen in a linear fashion. Rather, the decline will

accelerate as the warrant nears expiry. Without

going into the mathematical complexities, one can

think of this acceleration occurring because theimpact of a decline in the life of a warrant is much

greater in relative terms closer to expiry. For ex-

ample, a one-day decline in the life of a warrant

with 5 days to expiry reduces its maturity by 20%;

conversely a one-day decline in the life of a war-

rant with 100 days to expiry reduces its maturity

by just 1%.

Warrants that can be exercised at any point until

the expiration date are known as American style.

European style warrants can only be exercised on

the expiry date. For maximum flexibility, Goldman

Sachs warrants are typically American style.

All warrants whether American or European style

can be bought or sold on the stock market at any

time up to their expiry. To close out their positions

investors should sell back their warrants in the

market rather than exercising them in order to

realise both the intrinsic value and the time value

of the warrant.

Implied volatility

The volatility of the underlying asset is an essential

determinant of the time value of a warrant. Vola-

tility is a measure of the intensity of price move-

ments, not their direction. If the underlying asset

of a warrant has a high volatility then there isincreased uncertainty as to its future price. Again,

this uncertainty leads to a higher range of potential

outcomes, which in turn is reflected in a higher

time value.

Unlike the other components of a warrant price,

volatility is purely a best estimate and can vary

across the market. This estimate is often referred

to as implied volatility as it reflects the market

makers best estimate for future expected volatility.

One way of benchmarking a range of similar war-

rants is to compare their implied volatilities those

with the lowest implied volatilities generally offer

better value for money.

THE TIME VALUE OF A WARRANT RELATIVE TO THE TIME TO EXPIRY

200 150 100 50 5

Time value in Pence

Time to expiry in days

Warrant at-the-money

0,0

0,8


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Warrants with a higher implied volatility typically

have a higher time value than those with a lower

implied volatility. This is regardless of whether the

warrant is a call or put.

Risk-free rate of interest

Movements in interest rates will affect the time

value of a warrant. As interest rates rise, the time

value of equity call warrants will increase and vice

versa.

In order to understand this, consider a call warrant

as a deferred or delayed purchase of the underlying

asset. If this is the case, then, when interest ratesrise, investors will be happy to defer the purchase

of the underlying asset and instead put their capital

in a savings account to earn a high rate of interest.

As a consequence, call warrants become more

attractive to investors who wish to expose them-

selves to rising asset prices without actually having

to buy the shares themselves. This increased attrac-

tiveness is reflected in a rise in the time value of the

warrant.

The reverse is true with put warrants, which can be

viewed as a deferred or delayed sale of the under-

lying asset. If interest rates are rising, investors are

less likely to want to delay the sale of their shares,

as this prevents them from being able to put the

capital in the bank and earn a high rate of interest.

As a result, the time value of put warrants typically

falls as interest rates rise.

Dividend expectations

Changes to dividend expectations also affect the

time value of a warrant. If dividend expectations

increase, the time value of equity call warrants will

fall whilst the time value of put warrants will rise.

Once again, if call warrants are viewed as a

deferred purchase, an increase in dividends will

make delaying a purchase less attractive, and

consequently prices will fall. In the case of a put

warrant the reverse is true, as a deferred sale

becomes more attractive to investors and will drive

prices up.


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05.HOW DO WARRANTS &CERTIFICATES DIFFERFROM OTHER UKINVESTMENT PRODUCTS?


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19

The UK investment market offers investors a very

diverse range of products. This diversity comes in

a number of forms how risky the product is, the

asset class to which the investor is gaining expo-

sure, the taxation of the investment, its liquidity

and so forth. How do warrants and certificates fit

into this landscape?

If we compare them to other equity products on

a risk basis then certificates would be similar to

pooled investments such as unit or investment

trusts. Warrants on the other hand are inherently

riskier and would fit between traditional share

trading and higher risk derivative products such

as futures and options.

For a number of years, company and investment

trust warrants have been available in the UK.

Unlike Goldman Sachs warrants, these products

confer the right to buy new shares in the company

or investment trust conducting the issue. Due to the

limited issuance of these products there have been

problems in the past with liquidity and consistency

of pricing.

HOW DO WARRANTS AND CERTIFICATES DIFFER

FROM OTHER UK INVESTMENT PRODUCTS?

HAVENT WARRANTS BEEN AROUND

IN THE UK FOR SOME TIME?


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20

UK Equity-linked

Product Group

Listing &

Availability

Taxation Policy Typical Associated

Trading Charges

CollectiveInvestmentSchemes InvestmentTrusts, UnitTrusts andICVCs

Certificates

Exchange TradedFunds (ETFs)

UK Shares

Warrants

Company andInvestment Trustissued Warrants

UK Options &Futures

Contracts forDifference(CFDs)

Spread-bets

Investment trusts are

LSE listed and avail-

able to trade via

brokers. Unit trusts

and ICVCs are avail-

able in the primary

market only

LSE listed Available

through the majority of

UK brokers



UK brokers



UK brokers



UK brokers



UK brokers

LIFFE listed Available

through designated

brokers margin

account required

Not exchange listed

available through

specialist brokers

margin account

required

Not exchange listed

available through

spread-betting compa-

nies only

Stamp Tax payable

(although relief regime

in place for Unit Trusts

and OEICs). Income

and Capital Gains Tax

payable by the

investor over personal

allowances (these can

be reduced through

the use of an ISA)

No Stamp Tax. Capital

Gains Tax on gains

over 7,500 CGT

allowance

No Stamp Tax. Income

tax on dividends and

CGT on gains over

7,500 allowance

Stamp, Income and

Capital Gains Tax

payable (the latter two

can be reduced

through the use of an

ISA)


Gains Tax on gains

over 7,500 CGT

allowance

Stamp and Capital

Gains Tax on gains

over 7,500

CGT allowance

Capital Gains Tax on

gains over 7,500 CGT

allowance


Gains Tax on gains

over 7,500 CGT

allowance

No taxes apply

Broker commission,

management fees,

redemption charges

and bid/offer spread

(not in the case of

ICVCs)

Broker commission


Management fee,

broker commission


Broker commission


Broker commission


Broker commission


Broker commission


Broker execution fee,

funding spread and

bid/offer spread

Bid/offer spread and

rolling costs (closing

and re-opening bets

for longer-term expo-

sure)

Low Typically diversi-

fied investment

some are passive and

try to replicate the

returns of a pre-

defined benchmark,

others are active

which try and outper-

form a pre-defined

benchmark (this cate-

gory can be a higher

risk investment)


fied products that

passively replicate the

returns of a certain

index or sector. Single

stock certificates offer

no diversification


fied products that

passively replicate the

returns of a certain

index or sector. Activ-

ely managed ETFs are

as yet unavailable

Low/Medium Can

lose initial investment

but no more, no diver-

sification

Medium Can lose

initial investment but

no more, diversifica-

tion with index and

sector warrants

Medium Leveraged

product. Can lose

initial investment but

no more

Medium/High Lever-

aged product. Can

lose initial investment

but no more when

buying options. Can

lose more than initial

investment when

selling options and

trading futures

High Leveraged

product. It is possible

to lose more than

initial investment (stop

loss accounts can be

arranged at higher

cost)

High Leveraged pro-

duct. It is possible to

lose more than initial

investment (stop loss

accounts can be ar-

ranged at higher cost)

No leverage (except for

futures and options funds)

Typically diversified across

a pre-defined asset class

country or sector specific,

large and small-cap com-

panies etc

Pricing of unit trusts and

ICVCs driven by NAV

calculation, pricing of

investment trusts driven

by supply and demand

No leverage

Bi-directional investors

can be long or short the

underlying index, sector or

stock

Diversified in the case of

index and sector products

No leverage diversified

across a pre-defined asset

class

Equivalent to being long

the underlying

Pricing driven by NAV

No leverage

Typically a long only

investment although

shorting is available

through some brokers

Income (in the form of

dividends) and capital

gain to holder

Leveraged product

through optionality

Similar economics to

options but investors

can only buy warrants,

they cannot sell them

Global underlying range

Maturities to five years

Leveraged through option-

ality

Issued by companies or

investment trusts on their

own stock typically call

warrants only

Dilutive, typically long-

dated, pricing on supply/

demand basis

Leveraged through option-

ality (for options) and

margining (for futures)

UK underlying range-index

and FTSE 100 stocks, plus

some foreign underlyings

with USFs

Option maturities to nine

months and bi-directional

Leveraged through

margining


and bi-directional

Interest charges on long

positions, interest pay-

ments on short positions

Leveraged through

margining


and bi-directional

Typically short maturity

3 months

Product FundamentalsTypical Riskiness of

product group

Trusts or investment compa-

nies that enable investors to

pool their resources into a

collective scheme which

then invests in a wide range

of securities in order to

reduce risks through diver-

sification

Securities issued by a third

party that track the perform-

ance of a specified index,

sector or share

Securities that are similar to

collective investment

schemes but offer greater

price transparency and typi-

cally lower charges

Securities that represent part

ownership of a company.

Typically confer the right to

vote in General meetings and

receive dividends

Securities issued by a third

party that offer investors the

right but not the obligation to

buy or sell an underlying

asset at a set price within a

specified timeframe

Securities issued by a

company that confer the

right to buy new shares in

that company at a fixed price

on a future date

Options are contracts that

give the holder the right to

buy or sell an underlying

asset at a fixed price within a

specified timeframe. Futures

are contracts that require one

party to buy a specified asset

from another party at an

agreed price on a set date in

the future

Contracts where the investor

can buy or sell exposure to

an asset on margin (i.e.

paying only a percentage

of the total value- typically

10-20%)

A bet where participants buy

or sell exposure to an asset

on a per tick basis (e.g. 10

per index point on the FTSE

100)

Description

UK WARRANTS AND CERTIFICATES: A PRODUCT COMPARISON


23/32

06.WHY GOLDMAN SACHS?Goldman Sachs at a glance

21


24/32

22

WHY GOLDMAN SACHS?

Goldman Sachs, one of the worlds most highly-

respected investment banking and securities firms,

is offering a new opportunity for UK personal

investors: Warrants and Certificates.

This follows over a decade of success in building

markets in Europe, where today Goldman Sachs

offers clients a product range of more than 5,000

warrants and certificates. Further afield, Goldman

Sachs is a warrant market leader in Japan.

Now, as a UK investor, you can use Goldman Sachs

warrants to maximise returns or minimise risk inyour investments.

The Goldman Sachs range of warrants and certifi-

cates in the UK is based on an exciting selection of

domestic and international shares and indices, with

multiple combinations of maturity and leverage

available. We try to create a suite of products to

suit every market condition and investor viewpoint.

Goldman Sachs warrants and certificates trade just

like shares do, on the London Stock Exchange.

Goldman Sachs provides a highly liquid and

transparent market.

You can trade them by name through participating

UK brokers. Investors cannot deal directly with

Goldman Sachs.

The Goldman Sachs warrant website offers

valuation and selection tools to help you find the

product best suited to your investment objectives.

It also features real-time pricing information thatcan be personalised to track your warrant port-

folios.

Visit www.gs-warrants.co.uk

to learn more.


25/32

23

www.gs-warrants.co.ukWARRANTS INVESTOR HOTLINE: 0845 609 1555

GOLDMAN SACHS AT A GLANCE

One of the worlds oldest and largest investment

banking firms. Originally a partnership founded

in 1869, Goldman Sachs has been a public

company since 1999.

Offering a full range of investing, advisory and

financing services to a global client base of major

corporations, leading financial institutions,

governments and high net-worth individuals.

Headquartered in New York, with European

operations centred in London. In total, GoldmanSachs has over 40 offices in more than 20 coun-

tries, allowing it to combine profound know-

ledge of local markets with unrivalled interna-

tional execution abilities.

Goldman Sachs is constantly developing and diver-

sifying; applying expertise and creativity to help

clients identify and capitalise on opportunities

anywhere in the world.

Goldman Sachs customers join the ranks of

managers of major mutual funds, pension funds

and the investment departments of the leading

insurance companies who have come to trust our

market expertise. We are committed to meeting

their objectives and yours. We do this by calling

into play our acknowledged strengths in globalinstitutional trading and our comprehensive equity

research coverage. This allows us to react quickly

to or even anticipate the world events, industry

trends and company performances that drive global

markets.


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24

07.WARRANTSAND CERTIFICATESGLOSSARY


27/32

25

WARRANTS AND CERTIFICATES GLOSSARY

American style warrant

A warrant that can be exercised at any time during

its life.

Ask

The price at which a warrant market-maker is

willing to sell a warrant.

At-the-money

When the spot price of the underlying is equal to

the strike price of the warrant.

Automatic exercise

When the owner of the warrant automatically

receives the intrinsic value (if any) at expiry

without having to take any direct action himself.

The form of exercise is determined by the issuer at

the time that the warrant is issued, as part of the

terms of the warrant.

Basket

An underlying comprised of a series, or basket, of

different securities, indices or other financial assets.

Bid price

The price at which a warrant market-maker is

willing to buy a warrant.

Binomial model

A numerical model for calculation option prices

which works for both American and European

style options. The binomial model is more general

than the Black-Scholes model and is typically the

model used for option price calculations.

Black-Scholes model

A model used to calculate the value of a European

style call option. Developed in 1973 by Fischer

Black and Myron Scholes. It uses the stock price,

strike price, expiration date, expected dividends,

risk-free rate of return and the annualised standard

deviation (volatility) of the stocks return. For

American style options a different type of model

(normally a binomial model) is used.

Break-even

The underlying asset price at which the buyer of a

warrant makes neither a profit nor a loss if the

warrant is held to expiry. The break-even price for

a call is equal to the strike price plus the price paid

for the warrant, taking into account any multipliers

and cross-currency effects. For a put it is equal to

the strike price less the warrant price paid.

Call warrant

Confers the right but not the obligation to buy a

quantity of an underlying asset at a predeterminedprice on or before a predetermined date (or the

cash equivalent of this right).

Cash settlement

A form of settlement whereby the underlying asset

is not delivered to the holder of the warrant at

expiry, but rather the holder receives the intrinsic

value (if any) of the warrant in cash. Cash settle-

ment is typically more convenient for warrant

holders and has favourable stamp duty implications

in the UK.

Certificate

A form of warrant where the strike price is very

low (for calls) or very high (for puts) so that the

performance of the certificate closely matches the

performance of the underlying (or the inverse for a

put).

Closing price

An officially determined price for a security on a

particular trading day on a particular exchange

usually the last traded price or closing auction

price. The closing price of an underlying is typically

used as the reference for calculating amounts for

cash settlement.


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26

Company-issued and investment

trust warrants

Warrants issued by Companies or Investment

Trusts to raise capital. Upon exercise, the company

or trust will issue new shares or units, and hence

this type of warrant is part of the capital structure

of the issuer and is dilutive. This type of warrant

differs in many fundamental ways from covered

warrants and is not equivalent to a covered

warrant.

Contingent liability contract

A contract where one or both parties may have

payment obligations in future in addition to thoseat the inception of the contract. For example,

futures and spread bets may require the purchaser

to make payments in excess of their original invest-

ment if markets move adversely. In contrast,

warrants have no contingent liability for the

purchaser and the amount paid for the warrant is

the maximum possible loss.

Conversion ratio

The number of Warrants that must be exercised to

either buy (call) or sell (put) a unit of the under-

lying asset. (See also multiplier.)

Corporate action

An event in the underlying asset which requires

a change to the terms of a warrant in order to

preserve the economic positions of both the

warrant holder and the warrant issuer. An example

of a corporate action is a stock split or a spin-off.

Covered warrant

Covered Warrants are a specific sub-type of option

where the option contract is in the form of a trad-

able security. The security is issued by a third party,

such as an investment bank, rather than by the

issuer of the underlying asset. The cover refers to

the fact that the issuer buys or sells (covers) its

position in the market for the underlying asset.

Covered warrants are different from company

issued or investment trust warrants in many funda-

mental ways.

Delta

Delta is the amount by which the value of awarrant changes when the price of the underlying

changes by one unit, all other factors remaining

constant. For calls, the delta lies between 0 and 1;

for puts it lies between 0 and 1.

Derivative

Securities or contracts whose value is derived from

that of another asset or assets for example,

futures, options and warrants.

Dividend yieldThe dividend expressed as a percentage of the stock

price.

Diversification

The allocation of investments in a portfolio across

different securities, sectors or regions in an effort

to mitigate risk.

European style warrant

A warrant that can be exercised only on the

expiry date.


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27

Ex-dividend date

The date on which a stock starts trading without

entitlement to the last dividend. As a result, the

market price of the underlying normally adjusts

(e.g. drops) by the dividend amount.

Exercise

To invoke the right embodied in a warrant

asserting the right to buy the underlying asset at

the strike price (for calls) or sell the underlying

asset at the strike price (for puts); or to receive the

cash equivalent of this assertion. Note that,

because exercise delivers the intrinsic value of a

warrant and the value of a warrant is made up ofboth time value and intrinsic value, exercising early

generally delivers less proceeds to the holder than

selling the warrant.

Exercise period

The period over which the rights of the warrant

can be exercised, after which these rights lapse.

Exercise price see strike price

Exotic warrantA warrant with a non-standard structure (unusual

procedures for calculating or determining the strike

price or expiry value, the combining of caps and

floors, or the use of a barriers, for example).

Expiration date

The date on which a warrant expires and after

which the rights embedded in the warrant lapse.

Fair value

The theoretical value of a warrant as determined

using option pricing models.

Gamma

The metric used to describe the rate of change of

a warrants behaviour relative to the underlying

(delta). Gamma is defined as the rate of change

of delta.

Gearing

Gearing = Underlying Price/(warrant price X multi-

plier). Aimed at describing the level of equity expo-

sure achievable, with a particular warrant, gearing

is not generally considered to be as valuable a

metric as Leverage, which factors in the warrants

delta. (Please see Leverage)

Hedge

To buy or sell an asset to offset the risk generated

by a transaction in a related asset. For example, if

an investor wanted to reduce the risk of holding a

share portfolio whose performance closely matches

that of the FTSE 100 Index, the investor couldpurchase a FTSE 100 Put Warrant.

Historical volatility

A measure of the intensity of price fluctuation of

an underlying over a certain period in the past,

measured in terms of annualised standard deviation

of historical returns. (See volatility)

Implied volatility

Implied volatility is an estimate of an underlyings

volatility for a particular period in the future.

Implied volatility can be calculated (implied) by

taking the current warrant price and all other

known parameters of the warrant, and working

backwards through an option pricing model.

In-the-money

When the spot price of an underlying is above the

strike price (for calls) or below the strike price (for

puts). In other words, the warrant currently has

some intrinsic value.

Intrinsic value

For calls, the amount by which the underlying price

exceeds the strike price adjusted by the multiplier

to a per warrant amount. If the underlying price is

less than the strike price, then the intrinsic value is

zero. For puts, the intrinsic value is the amount by

which the strike price exceeds the underlying price

adjusted by the multiplier to a per warrant amount.

If the underlying price exceeds the strike price, then

the intrinsic value is zero.


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28

Issuer

The party who must fulfill the obligations

embodied in the warrant. For covered warrants,

the issuer is typically a bank, broker or investment

bank.

Leverag/elasticity

Leverage is the percentage change in the price of a

warrant for a one percent change in the price of the

underlying (as opposed to delta, which measures

absolute changes).

Life see exercise period

Lot size

The minimum multiple in which a warrant can be

traded or exercised. For example, a lot size of 100

means that a warrant trades in a minimum size of

100 warrants and multiples of 100 warrants there-

after.

Market-maker

The entity (usually a broker) obliged to provide a

bid price and a sell price for the warrants in ques-

tion at all times.

Maturity see expiration date

Multiplier

The number of units of underlying controlled by a

single warrant. Multiplier is the reciprocal of the

conversion ratio.

Offer price see ask price

Off-exchange trade

A transaction concluded directly between two

parties without involving an exchange as an inter-

mediary.

Option

A contractual agreement between two parties

which grants the buyer the right (but not the obli-

gation) to receive (call) or deliver (put) a certain

underlying asset from (to) the seller at a pre-deter-

mined price on a certain date or dates in the future.

Out-of-the-money

When the spot price of an underlying is below the

strike price (for calls) or above the strike price (for

puts). In other words, the warrant currently has no

intrinsic value.

Physical delivery

Fulfillment of the rights and obligations of a

warrant by exchanging the underlying against

payment of the strike price (as opposed to cash

settlement).

Premium

For a given warrant price, the percentage by whichthe underlying price needs to rise (for calls) or fall

(for puts) in order for a warrant holder to break

even at expiry (i.e. for the intrinsic value at expiry

to equal the given warrant price). Confusingly, the

term warrant premium is also sometimes used to

refer to the warrant price itself.

Prospectus/listing particulars

A legal document or set of documents which set

out the rights of warrant holders and the obliga-

tions of the warrant issuer.

Put warrant

Confers the right but not the obligation to sell a

quantity of an underlying asset at a predetermined

price on or before a predetermined date (or the

cash equivalent of this right).

Real-time quote

A published price for a security which matches the

actual tradable price of the security.

Rho

The metric used to describe the effect of a change

in interest rates upon the price of a warrant.

Risk free interest rate

Used by Black Scholes as part of the equation to

work out a warrant fair value it is typically

derived from the appropriate interbank loan rate

for the relevant time frame. (Please see description

of Black-Scholes model.)


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29

Securitised derivative

A derivative, usually an option, in the form of a

security (a negotiable instrument). Both certificates

and covered warrants are forms of securitised

derivative.

Spot price

The current market price for the underlying.

Spread

The difference between the bid price and offer

price.

Strike priceThe predetermined price at which the underlying

can be bought (for calls) or sold (for puts) as

defined in the terms of the warrant.

Stamp duty

Stamp duty and stamp duty reserve tax are govern-

ment charges on the transfer of certain securities

between parties. In the UK stamp duty is levied on

share transactions at a rate of 0.5%, paid by the

buyer. The UK Inland Revenue has confirmed that

UK stamp duty and SDRT are not payable on cash

settled warrants which are traded electronically.

Term see exercise period

Theta

A measure of the change in value of a warrant as

the remaining life to expiration decreases. Theta is

used to mathematically represent the decay of a

warrants time value.

Time decay see theta

Time value

The amount by which the current warrant price

exceeds the intrinsic value of the warrant. Time

value is a measure of the possibility of a more

favourable outcome in future.

Underlying

The financial asset to which a warrant relates. This

could be an exchange rate, an equity index, a

share, a debt instrument, a commodity or a combi-

nation of such assets.

Vega

The metric used to describe the effect of a change

in implied volatility upon the price of a warrant.

VolatilityA statistical measure of the intensity of fluctuations

in price of an underlying, expressed as an annu-

alised value. Volatility can be historic (looking at

actual volatility of an asset over a particular time

period in the past) or implied (an estimate of

volatility for a particular period in the future).

DISCLAIMER

This information has been prepared by the Equities

Division of Goldman Sachs International (GSI, andtogether with its affiliates GS) and is not the

product of the research department. It is for your

general information only and does not solicit you to

take any action or enter any transaction based on the

information contained herein. This information does

not constitute an offer, invitation or proposal to

promote the warrants referred to herein to any

person nor does it constitute a proposal to enter into

any contractual relationship with GSI. Investing in

warrants entails risk and you may lose your full

investment. GSI is not recommending that warrants

are a suitable investment for any category of

investors or for investors in general. You should

ensure that your broker provides you with the rele-

vant Risk Warning. GSI does not provide regulatory,

legal, accounting or tax advice. You are thereforeencouraged to seek independent advice on these

matters. This material has been prepared based

upon information that Goldman Sachs International

believes to be reliable. However, Goldman Sachs

International does not represent that this material is

accurate, complete and up to date and accepts no

liability if it is not. Any historical price(s) or value(s)are also as of the date indicated. GSI may be the only

market maker in the warrants referred to herein. GS

may, by virtue of its status as an underwriter, advisor

or otherwise, possess or have access to non-publicly

available information relating to the companies and

assets that are mentioned herein and shall be under

no obligation to disclose such status or any public

or non-public information. GS may from time to

time be an active participant on both sides of the

market and have long or short positions in, or buy

and sell, securities, commodities, futures, options,

warrants or other derivatives (together invest-

ments) (on a principal basis or otherwise) identical

or related to those mentioned herein and hedging

activities by GS relating to the products referred to

herein may affect the price of such investments andaccordingly the price of such products. Further infor-

mation may be obtained upon request from GSI's

London office at 133 Fleet Street. GSI is regulated by

the Financial Services Authority.


32/32

Goldman Sachs International

Peterborough Court133 Fleet Street

To learn more about Goldman Sachs warrantsand benefit from our warrant price alert service,

please visit our website:

www.gs-warrants.co.ukWarrants investor hotline: 0845 609 1555

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