Nagawarrants

Warrants
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FAQs

How are Structured Warrants (SW) holders different from shareholders ?

Why is buying SW better than buying shares using share margin financing ? Both provide leverage effect.

How do I take profit if I am holding a European-style (i.e. exercise only at expiry) SW ?

Is longer expiry SW better than shorter expiry SW ?

Are American-style SW better than European-style SW ?

Does the SW price always go up on listing day ?

Is SW trading a 'win-lose' game ? Does the SW issuer always take the opposite position to the SW holder ?

I bought call warrants on ABC Company. Should I hold them until expiry ? Is it advisable to do so ?

Are lower priced SW better ?

10.

Is low premium equivalent to cheaper SW ?

11.

What is a break-even price and how to calculate it ?

12.

In the above example, why would the price of call warrant be RM0.10 when the share is RM2.48 ?

13.

Why is implied volatility so important to SW investors ?

14.

How can I get the information about the SW listed on the exchange ?

15.

What is a Market Maker ?

16.

The underlying shares prices of my call warrants have moved up significantly but the call warrants prices did not change accordingly. Why is this so ?

17.

What will happen to my SW on expiry date ?

18.

Why is the trading of the SW suspended on the expiry date ?

19.

When can I receive my payment if I exercise the SW or hold the SW until expiry ?

How are Structured Warrants (SW) holders different from shareholders ?
SW holders do not have the same rights as shareholders of the underlying share. As a SW holder, you do not have voting rights and rights to receive dividends or bonus distributions from the listed companies. SW have a limited lifespan and you should sell or exercise the SW before they expire. Shareholders can hold the shares for as long as the company remains listed.

Why is buying SW better than buying shares using share margin financing ? Both provide leverage effect.
Apart from providing higher leverage than share margin financing, SW do not expose investors to margin calls. There are also no additional fees like processing fees, rollover fees, etc. There is no need for the SW buyer to post collaterals for buying SW.

How do I take profit if I am holding a European-style (i.e. exercise only at expiry) SW ?
You can buy / sell SW freely in the exchange just like shares. A good SW issuer will provide liquidity for buyers and sellers to participate in its SW.

Is longer expiry SW better than shorter expiry SW ?
Please see Naga Wisdom 3 : Six Factors Affecting Warrant Price - Expiry Period for explanation.

Are American-style SW better than European-style SW ?
Not necessarily. You will have to pay more for American-style SW compared to European-style SW as American-style SW allow you to exercise at anytime up till the expiry of the SW. European-style SW can only be exercised on the expiry date. Generally, most SW are never exercised. Therefore, the exercise style of the SW should not deter you from buying good warrants.

Please see Naga Wisdom 1: What is a Warrant? - American and European Warrants for more details.

Does the SW price always go up on listing day ?
Not neccesarily. The performance of the SW depends largely on the underlying asset.

Is SW trading a 'win-lose' game ? Does the SW issuer always take the opposite position to the SW holder ?
As a third party issuer, investment banks provide a platform for you to participate in the price movement of the underlying asset at a fraction of the share cost.

The SW issuer does not take any view on the direction of the price of the underlying asset. SW issuers seek to achieve a delta neutral position by hedging its position.

I bought call warrants on ABC Company. Should I hold them until expiry ? Is it advisable to do so ?
No. Call warrants are short-term trading instruments. Generally, holding on to the warrants until expiry will erode the capital invested. Unless you have an extremely bullish view on the underlying asset, you should not buy and hold the call warrants until expiry. Every day the underlying asset does not move in your favour, you may lose money due to the time decay. If the underlying asset takes too long to reach your target price, the call warrants may not track the movement of the underlying asset (please see Q15). Call warrants are a suitable trading instrument if you are confident on the underlying asset and its potential upside within a short time frame.

Below are two diagrams illustrating the effect of the expiry date on the call warrant price. At the same share price, the call warrant with 6 months to expiry has a value of RM0.06, whereas the same call warrant with 1 month to expiry only has a value of RM0.04. If you practice the holding strategy, it would cause a loss to your warrant trade because of the time decay.

Diagram A
Current Date: 1 Jan 2009 (6 months to expiry)

Diagram B
Current Date: 1 May 2009 (1 month to expiry)

Are lower priced SW better ?
Not necessarily. Lower priced SW usually have high exercise ratios e.g. 50:1, 100:1; which means the SW have very low delta (close to zero). With every unit change in the price of the underlying asset, the SW prices may move very little or remain unchanged.

Therefore, these SW often do not closely track the performance of the underlying asset unless the underlying asset experiences huge price fluctuations.

The two diagrams below show a comparison between two call warrants (similar terms) with different exercise ratios. The call warrant in Diagram B, priced at RM0.03 with an exercise ratio of 10 warrants to 1 share, is 50% cheaper than the call warrant in Diagram A, which is priced at RM0.06 with an exercise ratio of 5 warrants to 1 share.

Notice that the gearing and premium remain the same for both call warrants. This example shows that a low-priced SW is not better.

Diagram A
Exercise ratio = 5 warrants: 1 share
Call warrant price = RM0.06

Diagram B
Exercise ratio = 10 warrants: 1 share
Call warrant price = RM0.03
PREMIUM & GEARING REMAINS THE SAME

10.

Is low premium equivalent to cheaper SW ?
There is a common misconception amongst investors, that low premium SW are always cheaper and more preferable than those with high premiums. Low premiums tend to be associated with more ITM and lower gearing SW while higher premiums tend to be associated with more OTM and higher gearing SW. However, high premium SW do not necessarily mean that they are more expensive than those with lower premiums. You can use the formula below to calculate the worthiness of the premium. The formula for premium is as follows :

Premium for Call warrant	=	[(Warrant price x Exercise ratio) + Exercise price] - Underlying price
		Underlying price

You should remember that one of the main reasons to buy SW (rather than shares) is for leverage. To base your decision on low premiums is not necessarily the right valuation method when deciding to participate in trading SW. Instead, you should be comparing several other valuation methods, such as the implied volatility of the SW, to gauge the expensiveness of the SW, exercise price, effective gearing, expiry, etc.

Please see Naga Golden Rule 2: The Selection Process to help you select suitable SW according to your risk preferences.

11.

What is a break-even price and how to calculate it ?
The break-even price is the price you paid for the SW. However, a lot of investors treat conversion price as the break-even price for their SW. Conversion prices are only relevant if the SW are physically settled (i.e. convert into actual shares of the company), which are usually the case for company warrants, whereas most SW are cash-settled.

Using the call warrant example below, the conversion price is :

Call warrant name Call warrant issue price Exercise price Underlying share price at issuance Current underlying share price Exercise ratio Remaining time to expiry	: : : : : : :	ABC-CI RM0.075 RM2.11 RM2.11 RM2.40 5 warrants: 1 share 6 months

Conversion price	= = =	(Warrant price x Exercise ratio) + Exercise price (RM0.075 x 5) + RM2.11 RM2.48


	If you hold physical-settled call warrants on ABC, you would only sell when the underlying price is above RM2.48, which is above the current price of the underlying share (RM2.40). However, when the share price is RM2.40,the theoretical warrant price of ABC-CI could already be RM0.10, which could make you a gain of 33%. Therefore, you should not be too concerned with the conversion price of call warrants. Instead, you should be more interested in the theoretical price of call warrants. A theoretical warrant price can be obtained using Warrants Calculator.

12.	In the above example, why would the price of call warrant be RM0.10 when the share is RM2.48 ? The issuers of the SW will post bid and ask quotes on the exchange at the SW's fair price (theoretical price). The theoretical SW price can be calculated using Warrants Calculator. As a registered Market Maker, its activities are regulated and monitored by Bursa Malaysia. For more details, see Q15.

13.	Why is implied volatility so important to SW investors ? Implied volatility reflects the market views on the future movements of the underlying asset over the lifespan of the SW. An underlying asset price that is not moving will have a low implied volatility. In short, the higher the price fluctuates, the higher the implied volatility of the SW. For example, a RM1.00 SW that fluctuates at RM0.10 has higher implied volatility than a RM1.00 SW that fluctuates at RM0.01. Implied volatility is important because it can impact the price of the SW even though the underlying shares price remains unchanged. The rise (or fall) in implied volatility may mean the market expectation on the increase (decrease) movements from the underlying shares in the future. Implied volatility is constantly changing and may move more often in active SW or when there is a sharp swing in the underlying shares or the equity market as a whole. By comparing the implied volatility of all SW with similar terms over the same underlying share, you can find out if the SW are over-priced compared to other SW.

14.	How can I get the information about the SW listed on the exchange ? On the SW prices - Warrants Price Feed or Bursa Malaysia or information provider's websites. Other information, such as warrant announcements and listing documents, etc. - Listing Documents or Bursa Malaysia.
15.	What is a Market Maker ? A Market Maker provides liquidity to the SW by posting quotes at both the bid and ask (buy and sell) with adequate size at a minimal spread. There are two types of Market Maker - voluntary or by obligation. A voluntary Market Maker is not registered with Bursa Malaysia and is driven by its own profit objectives. This may includes stockist, syndicate or any other party whose activity is out of the issuer's control. A Market Maker by obligation is usually the SW issuer or a designated party appointed by the SW issuer who is registered with Bursa Malaysia. The Market Maker's role is to provide liquidity and its activity is monitored / regulated by Bursa Market Making Directives. Liquidity provision by market makers creates market depth and enables price discovery according to the price movement of an underlying asset.

16.	The underlying shares prices of my call warrants have moved up significantly but the call warrants prices did not change accordingly. Why is this so ? There are many reasons why the call warrants prices do not follow the upward movements of the underlying shares. Common situations include : a. Implied volatility is falling. b. The call warrants are deep Out-of-the-Money (eg. warrant price is RM0.01), and hence have very low Delta. c. The call warrants have high conversion ratios (eg. 200 SW: 1 share). d. The rise in intrinsic values is unable to cover time decays. e. The trading of underlying asset or call warrants has been inactive.

17.	What will happen to my SW on expiry date ? If the SW are not sold off on expiry date, the SW will be automatically exercised, provided the SW are ITM. You will be paid a cash settlement amount according to the remaining value of the SW at expiry. You are advised to read and understand the Base Prospectus, any supplemental documents and the relevant term sheet for more details on the settlement method of the SW. For examples on our listing documents, please refer to Listing Documents - Term Sheet & Base Prospectus.

18.	Why is the trading of the SW suspended on the expiry date ? In accordance with the relevant regulations, the SW will be suspended from trading in the exchange 2 market days before expiry date. If you did not sell your SW in the exchange on the last trading day, all cash-settled ITM SW will be automatically exercised on the expiry date. Settlement based on 5 day VWAP or average closing price for 5 market days usually refers to the five valuation days prior to the expiry date, as illustrated below.

AUGUST
SUN	MON	TUE	WED	THU	FRI	SAT
2	3 Day 1	4 Day 2	5 Day 3	6 Day 4 Non Trading Day	7 Day 5 Non Trading Day	8
9	10 Expiry Date Non Trading Day	11	12	13	14	15


19.	When can I receive my payment if I exercise the SW or hold the SW until expiry ? For cash-settled ITM SWs, you can expect to receive the payment cheque posted within 7 market days from the date the exercise notice is received or from the expiry date.