10 Things You Should Know About Warrants
Each warrant is linked to an underlying asset, for example a share, an equity index or a basket of shares that are listed or quoted on a stock exchange. The price of the underlying asset is a major price factor for the warrant. Having a good understanding of the underlying asset will enable investors to make informed decisions. An investor may possess two different views, bullish or bearish, on the underlying asset. Assuming other factors remain unchanged, when the price of the underlying asset increases, the theoretical price of a call warrant will increase while the theoretical price of a put warrant will decrease. The converse will be observed when the price of the underlying asset decreases. To have a better understanding of the warrants market, investors can visit BNP Paribas’ warrants website at www.bnppwarrants.com.sg and browse through the “Market News and Stats” section. It offers comprehensive statistics that could help you spot the latest market trends.
2. Strike Level
A price at which structured warrants are exercised. It is often referred to as exercise level. The difference between the underlying asset’s spot level and the structured warrant’s strike level equals the amount per warrant paid to the holder upon the maturity of the warrant, assuming the conversion ratio is 1 to 1. For example, if the share price of ABC is SGD 10 and the strike level of a 1 to 1 ABC call warrant is SGD 9, we refer to this as in–the–money (“ITM”) warrants where the share price is greater than the strike level for call warrants. The investor will receive SGD 10 – SGD 9 = SGD 1 at maturity. This is also the intrinsic value of the warrant at maturity. A call warrant is worthless if it expires out–of–the–money (“OTM”) i.e. the underlying asset’s spot level is lower than the strike level for call warrants at maturity date. A put warrant is OTM if the underlying asset’s spot level is higher than the strike level.
3. Maturity Date, Intrinsic and Time Value
The predetermined date on which the warrant expires. Time to maturity will affect the warrant price directly as it signifies the time value a warrant carries. The further away the maturity date, the higher the chance the warrant may become ITM. For example, if warrant A expires in 3 months and warrant B expires in 6 months, warrant B will be worth more as it holds a greater time value. However, time value will fall closer to zero as the maturity date approaches and the time decay rate accelerates at the same time. This is known as time value decay.
For structured warrants listed on the Singapore stock exchange (“SGX”), traders and investors should note that they will not be able to purchase or sell them after the last trading day, which is the fourth business day before the pre–determined maturity date. For example, if the warrant expires on Friday, the last trading day will be the Monday before its maturity.
