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By Pehon | July 22, 2007
Have you ever seen the wierd names like GENTING BHD SGA ECW080324 listed on your stock charts?
Well, what you’re looking at are structured warrants. Structured warrants give the buyer the right, but not the obligation, to buy or sell the security at a predetermined price on or before a predetermined date.
If you still don’t understand what the hell you just read, read on.
There can be 2 types of structured warrants. Index Warrants and Stock Warrants. The prices of Index warrants are affected by the underlying indices (ie. STI) and the prices of Stock Warrants are affected by the underlying stock prices(ie SGX).
When you buy a Call Warrant, an increase in the prices of the underlying stock will cause the price of the warrant to increase, while for a Put Warrant, a drop in the prices of the underlying stock would cause an increase.
Before we move any further, we must know how to read the names. We take an example from the current market.
STI 3300 BNP EPW071030
STI - Underlying index
3300 - Strike price
BNP - Issuer SG
E- European style warrant. All you need to know is SGX only has European warrants
PW - Put Warrant. Call Warrants will be written as CW
071030 - Expiry date being 30th October 2007
You will notice that the strike price of a stock warrant will not be listed in its name. It can be found at http://sg.warrants.com/.
CALL WARRANT
Using the CW of STI 3700 BNP ECW071030 as an example. If the STI were to close at 3699 on 30th October 2007, the Warrant would be worthless, which means what ever you paid for the warrant would be gone. However, if the STI closes at 3800 on the same date, base on the conversion ratio of 590 (again, this information is avaliable at sgwarrants, and is unique for each warrant), you’re entitled to recieve $0.169 ((3800-3700)/590) per warrant owned, regardless of your purchase price.
But you got to understand that there is the option of selling the warrant before the expiry date. For example, if you were to buy the warrant at $0.1 early in the life of the warrant, and the STI rises to above the 3700 level, the warrant would be worth way more than $0.1. You can then sell it then, instead of risking a market correction that brings the STI below the 3700 level at expiry.
PUT WARRANT
Using the example of STI 3300 BNP EPW071030, its basically an instrument for the bear investors. If the STI (the underlying stock) closes at 3301 on the 30th October 2007, the warrant you bought would be worth nothing. However, for settlement of a Put warrant at expiry is different from a call warrant.
Settlement level of a put warrant is the arithmetic mean of the closing prices of an underlying stock for each of the five trading days immediately preceding the maturity date.
For the above example, if the STI, for the next 5 trading days from 30th October 2007, closes at 3350,3300, 3200, 3100, 3150, the average would be 3220, and that will be used for settlement calculation. You’ll be recieving $0.136 per warrant, based on the 590 conversion ratio, regardless of the buy price.
APPLICATION
So equiped with the new knowledge, how can you apply it? We will be talking about it over the next few days. I’ll be talking about using Put Warrants as an insurance to protect your portfolio in a bear market next. So do stay tuned!
Topics: Quick Lesson |
Comments
July 22nd, 2007 at 10:40 pm
i have a question for Call warrants. based on your example, if let say i bought 10 lots at .10 and when it expired, it is above the strike price like in your example, what will happen to my purchase? will i get .169 per warrants and my capital?
July 23rd, 2007 at 8:56 am
No. You’ll get $0.169 per warrant, regardless of your buy price. So you’ll not get your capital back. thats the risk when you buy the warrant, ie do not over pay for the warrant
July 23rd, 2007 at 11:54 am
cool.thks new to warrant. thanks for the explanation
July 23rd, 2007 at 6:30 pm
Further question, where is the 590 conversion ratio obtained from?
July 23rd, 2007 at 8:45 pm
hey, u can find the 590 conversion ratio from http://sg.warrants.com/ . it is also known as Entitlement Ratio.