With every tumble of the Japanese stock market since mid-January, the Kingdom of Denmark has been helping hundreds of U.S. investors make money.
No, this is not a fairy tale from a magical place across the sea, but one of the amusing quirks of global communications and the creativity Wall Street devotees to modern finance.
The story, for individual investors, began in January when Denmark, with the encouragement and assistance of Wall Street's Goldman, Sachs & Co., issued 10.3 million "put warrants," pegged to the level of Japan's Nikkei stock average, for trading on the American Stock Exchange. Denmark is obligated to pay warrant holders, who can choose to exercise the warrants anytime over the next three years, cash if the Nikkei closes below 37,516.77, its level when the bulk of the warrants were issued Jan. 12 at $4.05 each.
Since then, the Nikkei has plunged and the warrants have become a dream come true for people who bought early.
With the Nikkei index was down to the 28,000.00 range on the Tokyo Stock Exchange, the Denmark warrants that haven't yet been exercised are trading for about $12 on the Amex.
Denmark wasn't looking to place a bet that the Nikkei would rise when it issued the warrants. It merely set out to make a bit of pocket change--something less than $2 million--to offset the cost of a recent Eurobond issue.
Nearly all of the $45 million Denmark received for issuing the warrants was spent to buy slightly less-expensive put warrants traded among institutions offshore. Those put warrants are intended to make up for the money Denmark stands to pay out.
Salomon Bros. and Merrill Lynch have also put together issues of similar warrants. The Merrill warrants were actually issued by Bankers Trust New York Corp., just as the Goldman warrants were issued by Denmark. Morgan Stanley & Co. has also prepared an issue of put warrants, but it stalled because it hasn't been able to set up a hedge on the position, now that the Nikkei has already fallen so much.
David Stowell, a Goldman investment banker, said the firm used Denmark to back the issue because it "has a superior credit rating" that reassures investors they will be paid.
Thus, more than half of the 68-page prospectus for the warrants is filled with financial statements from Denmark and Danishtrivia, including the facts that only 100 of the kingdom's 500 islands are populated and that the gross value of egg production has been flat for several years at about 500 million Danish kroner.
George Reichhelm, the specialist who makes markets in the warrants on the Amex, joked that he learned more about Denmark from the prospectus "than I ever did in high school."
For Reichhelm and the exchange, the warrants have been a boon in otherwise slow times. Trading in all of the put warrants now accounts for 14% of exchange daily volume.
Reichhelm believes that some of the volume is "starting to have a little flag-waving to it. There's a tremendous pro-American sentiment to bet against the Japanese."
He believes that more than half of the trades in the warrants are being made for individuals, though more of the total warrant volume comes from institutions.
The warrants are structured so that it only takes a few thousand dollars to bet, but they are recommended by the exchange and in the prospectuses only for people experienced with similar financial instruments.
"It is not a place for amateurs," said Michael Stolper, a San Diego-based investment consultant.
Sandor Cseh, an international money manager for Provident Capital Management in Philadelphia, adds that it may be too late for individuals to make money on put warrants now that the Nikkei has fallen so much. "At this point, it looks like a bit of gambling," he said.