NEW MARKET EMERGES IN WARRANTS FOR GOLD

  A new market has emerged in warrants to
  buy gold, a vehicle which bankers say brings some of the play
  of commodity options into the field of securities.
      Over the past three weeks, Swiss offices of American banks
  have launched a total of four issues of warrants with varying
  conditions, drawing on renewed inflationary worries and the
  recovery of the gold price last year.
      And Credit Suisse and Credit Suisse-First Boston each
  issued Swiss franc bonds with warrants for gold which have a
  similar character, though they are aimed at a less professional
  market.
      The market is still small. Taken together, the four
  American-led warrant issues raised only about 50 mln Swiss
  francs.
      But banks believe the vehicle meets a need of investors and
  predicted a lively future.
      Andrew Barrett of Citicorp Investment Bank (Switzerland) AG
  said: "The warrants give smaller investors a chance to have a
  long-term investment in gold with limited risk."
      Citicorp in Zurich launched the first of these warrants on
  February 27, following it up with a second issue less than a
  week later. The issuer in both cases was Citibank NA.
      The idea found some quick copies. Goldman Sachs in Zurich
  organized and co-led an issue for the Swiss branch of Banque
  Indosuez on March 9 and last night Morgan Guaranty
  (Switzerland) AG did another for Morgan Guaranty Trust Co of
  New York.
      The four issues now offer investors striking prices for
  gold ranging from the Indosuez issue at 410 dlrs an ounce, the
  same price as the underlying commodity, to a 430 dlr level on
  the first one for Citibank.
      The premiums range from 22 pct to 36 pct and maturities
  from 18 months to four years and three months, in all cases
  longer than gold futures and options on U.S. Markets.
      The bankers traced the inspiration for the market back to
  the February report of U.S. Consumer prices for January, when a
  jump of 0.7 pct raised again the threat of inflation.
      "Many people are worried about inflation again," said Mats
  Joensson of Goldman Sachs. "Money supply in Germany and the
  United States has grown very strongly in the last year and
  people want to take a ride on gold."
      The gold market, having seen strong gains in 1986, has
  languished just above 400 dlrs an ounce over the past few
  weeks. But the banks saw in warrants the vehicle for a more
  highly leveraged play where the downside risk was limited.
      Barrett said it was natural that the market developed in
  Switzerland. "People here understand gold, and they understand
  warrants," he said.
      Citicorp (Switzerland) pioneered warrants with a series of
  equity-linked covered issues based on Japanese company shares
  over the past two years, and last autumn, Swiss banks launched
  covered warrants in Swiss registered shares in a bid to give
  foreign investors a chance to play in a market otherwise closed
  to all but Swiss citizens, and to play it with higher leverage.
      But after a quick flurry of issues, that market dried up
  when Swiss shares prices fell from their January peaks.
      The issues are being marketed not on the basis of simple
  premiums, but on implicit volatility models devised to provide
  scientific comparisons between titles in the options market.
      Martin Bachem of Morgan Guaranty said his bank's issue was
  competitive despite its relatively high premium. The issue, for
  five ounces at 425 dlrs, was priced at 955 Swiss francs, making
  a premium over the spot gold price of nearly 36 pct.
      Using a Black Sholes options model, he said the issue's
  long, 4.3-year maturity meant the warrants needed an implicit
  volatility of gold of only 24.5 pct for the option to pay off,
  which he claimed was lower than the other issues.
      But Barrett said the Black Sholes variant Citicorp used
  pointed to a higher volatily for the Morgan issue and
  emphasized that the models were at best an inexact science.
      And each bank, using its own model, put the implicit
  volatility needed for its own issue at close to 25 pct.
      Whatever the calculation, the issues have received a warm
  welcome from investors.
      Joensson of Goldman Sachs said there was a lot of demand,
  even among small investors, who were buying 15 or 20 warrants
  apiece. "The most sophisticated ones wouldn't buy these because
  the premiums are too high," he said.
  

