Denmark, Goldman, and those Japan put warrants

A friend of mine told me a story about how Denmark was part of some early financial innovation in the beginning of the 1990s. I guess it’s old news, but it’s a cool story.

Here’s the LA Times:

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.

Graphically it looks like this:

Picture 1 Denmark, Goldman, and those Japan put warrants

And a summary in words:

Picture 4 Denmark, Goldman, and those Japan put warrants

Interesting to sell your rating and ability to get clearing from the SEC. Although, I’m kinda wondering if this is not a little bit more risky that just pocketing a spread [full faith and credit and all given counterparty risk and so on], but what do I know.


  • Ede

    I owned about 2% of this issue in 1990. They were a great vehicle to get short the Nikkei in an era when there were limited other choices. We bought big blocks at about $3 from Dean Witter and Goldmans and exited from $18 to $21. It was a shame about the warrant portfolio that was held long against it!

  • Simon

    Hi Ede – that’s interesting! I just found it fascinating how Denmark was convinced to underwrite this issue for no apparent reason (to me), except pocketing a little spread. Nice story, though.