Nagawarrants

Warrants For Beginners
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Six Factors Affecting a Warrant's Price

Four major factors that determine the price of a warrant :

i.
ii.
iii.
iv.

Underlying Price
Exercise Price
Expiry Period
Volatility

Two minor factors that have a lesser impact on the price of a warrant :

v.
vi.

Dividend Expectations
Interest Rates

Underlying Price
The higher the underlying asset price, the higher the call warrant price. A rise in the underlying asset price is positive for a call warrant.

See Naga Wisdom 4: Warrant Pricing, for a more detailed explanation

ii.

Exercise Price
Higher exercise price results in a lower call warrant price. The reason being a higher exercise price makes it harder for a call warrant to be ITM.

iii.

Expiry Period

	Warrant A	Warrant B
Underlying	ABC	ABC
Current underlying price	RM2.50	RM2.50
Exercise price	RM2.11	RM2.11
Exercise ratio	5 warrants : 1 share	5 warrants : 1 share
Expiry period	6 months	12 months
Warrant price	RM0.105	RM0.127

The two call warrants above are the same except for the expiry period. Everything else being equal, the longer the expiry period of the warrant, the more expensive it will be.

Since Warrant B has a longer expiry period and therefore higher chances of becoming ITM, it has better value than Warrant A.

See Naga Wisdom 4: Warrant Pricing - Time Value, for a more detailed explanation

iv.

Volatility
Volatility is the main factor determining the price of a warrant. Volatility does not imply a direction, it only means the rise and fall of the warrant is greater for a more volatile warrant compared with a less volatile warrant.

For example, a RM1.00 warrant that fluctuates at RM0.10 has a higher volatility than a RM1.00 warrant fluctuating at RM0.01.

The higher the volatility, the higher the price of the warrant will be. The reason for this is that there is a higher chance for the underlying asset of a high volatility warrant to exceed (for call warrants) the exercise price.

Historical Volatility
Historical volatility is based on the price data of past movements in the underlying asset price.
Volatility is measured over a regular interval, for example, 10 days, 30 days, 90 days, 100 days or 250 days.

Implied Volatility
Implied Volatility is a measurement of how the market participants expect the underlying asset to behave in the future.

Dividend Expectations
A dividend payment by the underlying share will not have a significant impact on the price of the warrant unless the underlying share has an unexpected dividend payout.

vi.

Interest Rates
If you take a loan from a bank, you need to service the interest. Similarly when you deposit money in a bank, the bank pays you interest.

Buying a call warrant is like getting a loan from the call warrant seller or issuer. A higher interest rate means a higher financing cost. Therefore, buying a call warrant will be more expensive when interest rates are high.

Factor	Change of Factor	Impact on Call Warrant Price
1. Underlying Price	Increase
2. Exercise Price	Increase
3. Expiry Period	Decrease
4. Volatility	Increase
5. Dividend Expectations	Increase more than issuer expect
6. Interest Rates	Increase

You can arrive at a theoretical warrant price by using the above determinants as inputs into the following option pricing models:

   a) Black Scholes
   b) Binomia
   c) Trinomial

Click here for NagaWarrants Calculator.