| Naga Wisdom 4 |
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Warrant Pricing
Formula: Warrant Price = Intrinsic Value + Time Value
Intrinsic Value
The intrinsic value of a warrant is the difference between the current underlying price and the warrant's exercise price.
When the underlying price is above the exercise price for a call warrant, the warrant is ITM and has an intrinsic value.
In other words, only ITM warrant has an intrinsic value. For OTM warrant, the warrant has no intrinsic value and only has time value. |
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Call warrant
Intrinsic value = Underlying price - Exercise Price |
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Time Value
A warrant has a limited lifespan. Hence, the warrant you hold diminishes in value every day. A warrant with some time remaining until expiry is worth some value since there is a possibility that the warrant will be ITM. At issuance, the time value is at a maximum of 100%. At expiry, the time value falls to 0% (as shown in Diagram 3). Time decay (the rate of decrease in time value of the warrant) accelerates when the warrant is near to its expiry. |
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Using the example above, a call warrant with an exercise price of RM2.11 and share price of RM2.50 has a theoretical warrant price of RM0.105 (using the NagaWarrants Calculator).
The intrinsic value of the warrant is RM0.078 ([RM2.50 - RM2.11] / 5 ratio) and the remaining of RM0.027 (RM0.105 - RM0.078) is the time value.
(Diagram 3: Time value to expiration)
(Example)
Call warrant |
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| Underlying |
ABC |
| Current underlying price |
RM2.50 |
| Exercise price |
RM2.11 |
| Exercise ratio |
5 warrants : 1 share |
| Call warrant price |
RM0.105 |
| Time to Expiry |
6 months |
| Volatility |
45% |
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Using the example above, a call warrant with an exercise price of RM2.11 and share price of RM2.50 has a theoretical warrant price of RM0.105 (using the NagaWarrants Calculator).
The intrinsic value of the warrant is RM0.078 ([RM2.50 - RM2.11] / 5 ratio) and the remaining of RM0.027 (RM0.105 - RM0.078) is the time value. |
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