# TERMINOLOGY

### Terminology

##### AMERICAN-STYLE

A warrant that may be exercised on any market day up to and including the expiry date.

##### AT-THE-MONEY

A situation where the warrant's exercise price is identical to the underlying asset price. An at-the-money warrant has no intrinsic value, but may still have some time value (depends on time to maturity). For example, if ABC stock is trading at RM3.00, then the call option or put option with the exercise price of RM3.00 are said to be at-the-money.

##### BLACK-SCHOLES MODEL

One of the most commonly used option pricing models.

##### BOARD LOT

The minimum number of warrants to trade in Bursa Malaysia. 1 board lot = 100 units of warrants

##### BREAK-EVEN LEVEL

Refers to the price at which a transaction produces neither a gain nor a loss.

##### CALL WARRANTS

A call warrant offers its holder the right, but not obligation to purchase a certain amount of the underlying asset on a pre-determined exercise price within a pre-determined time.

##### CASH SETTLEMENT AMOUNT

The positive amount received from the exercise or automatic exercise of the warrant at expiry.

In the event the Cash Settlement Amount is less than or equal to zero, warrantholders shall not be entitled to receive any payment in respect of the structured warrants.

##### CONVERSION RATIO

Please refer to EXERCISE RATIO.

##### DELTA

Measures the theoretical movement in warrant price when the price of the underlying asset changes. Delta for call warrant lies between 0 and 1. Delta for Put Warrant lies between 0 and -1.

For example, a warrant with conversion ratio of 1, a delta of 0.50 implies that if the value of the underlying changes by 20 cents, then the value of the call warrant should change by 10 cents.

##### EFFECTIVE GEARING

Measures the theoretical percentage change in warrant price for every 1% change in the underlying price. For example, effective gearing of 10 times, other factors being equal, means for every 1% change in underlying price, the warrant price moves by 10%.

##### EUROPEAN-STYLE

A warrant that is automatically exercised on the predetermined expiry date.

##### EXERCISE PRICE/ LEVEL

The predetermined price/ level for the warrant holder to buy or sell the underlying of the warrant. It is used to calculate the cash settlement amount of a cash-settled warrant at the expiry.

##### EXERCISE RATIO

TThe number of warrants related to one unit of the underlying that the warrant holder is entitled to buy or sell. For example, an ABC call warrant with a ratio of 5 warrants : 1 ABC share would indicate that 5 warrants are needed to exercise the right to buy one ABC share at the exercise price. For warrants linked to the price of shares, the ratio may be adjusted to reflect corporate actions, such as bonus issues, stock splits, rights issues, share consolidations or special dividends.

##### EXPIRY DATE

The date the warrant expires; where the right of the warrant holder to exercise the warrant ceases

##### GAMMA

Measures the changes of a warrant's delta as the price of the underlying asset changes, all other factors remain constant.

##### GEARING

The additional exposure gained on the underlying by purchasing warrants.

For example, a warrant with gearing of 10x will have 10 times more exposure than if you purchased the underlying asset. To estimate the increase or decrease in the warrant price in relative to the underlying asset price, we should look at effective gearing.

##### HEDGE

Hedging is a strategy to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security to protect the value of an asset or a portfolio.

##### HISTORICAL VOLATILITY

Used as a reference to assess the previous price fluctuations of the underlying asset. Normally expressed in number of days, e.g. 10-day volatility, 90-day volatility etc.

##### IMPLIED VOLATILTY

Most important factor that affects the price of structured warrants. It refers to the estimate of future price volatility of a specified underlying and is used by the market as an indicator to decide whether a warrant is cheap or expensive. With all factors being equal, the higher the implied volatility, the higher the warrant price.

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.

##### IN-THE-MONEY

An in-the-money option has intrinsic value more than zero.

For call warrant, it is said to be in-the-money if Underlying Price > Exercise Price;

For put warrant, it is said to be in-the-money if Exercise Price > Underlying Price.

##### INTRINSIC VALUE

The amount by which a warrant is in-the-money.

##### ISSUER

The entity that issues warrants, usually a financial institution, e.g. Kenanga Investment Bank Berhad

##### LAST TRADING DAY

Three (3) market days immediately before the expiry date of the warrant.

##### LIQUIDITY

A structured warrant is considered liquid when there is:-

- Adequate trading volume; and/ or
- Sufficient depth in bid and ask price; and/ or
- Quantity during trading hours.

##### LISTING DAY

The day the warrant is listed and quoted on the exchange.

##### LIQUIDITY PROVIDER

Please refer to MARKET MAKER.

##### MARKET MAKER

Market maker provides liquidity by posting bid and offer prices on the trading system of Bursa Securities on each market day over the life of the structured warrant. Market maker can be the issuer itself (e.g. Kenanga Investment Bank Berhad) or an appointed designated market maker.

##### MONEYNESS

Relationship between exercise price and the underlying asset price. There are three forms of moneyness, which are In-the-Money, At-the-Money and Out-of-the-Money.

See also IN-THE-MONEY, AT-THE-MONEY and OUT-OF-THE-MONEY.

##### OUT-OF-THE-MONEY

An out-of-the-money option has intrinsic value equals to zero.

For call warrant, it is said to be out-of-the-money if Underlying Price < Exercise Price;

For put warrant, it is said to be out-of-the-money if Exercise Price < Underlying Price.

##### PREMIUM

Measures the percentage of the underlying asset has to rise (Call Warrant) or fall (Put Warrant) for a warrant holder to become break-even if he/she holds the warrant until expiry.

##### STRIKE PRICE

Please refer to EXERCISE PRICE.

##### THETA

Measures the expected daily decline in the value of a warrant due to time decay, all other factors remain constant. Theta is always negative as time decay is always working against a warrant holder.

##### TIME DECAY

Time value declines in time to expiration because the probability of that option being probability of that warrant being profitable (in-the-money) is reduced.

##### TIME VALUE

The difference between the warrant price and intrinsic value.

##### UNDERLYING ASSET

The financial instrument referenced by the warrant.

E.g. | The underlying asset of ABC-CA is the ABC shares; |

The underlying asset of FBMKLCI-C8 is the KLCI Index. | |

V

##### VOLATILITY

The uncertainty in the price movement which will affect the return of the underlying.

See also HISTORICAL VOLATILITY and IMPLIED VOLATILITY.

##### WARRANTHOLDER

The person whose names for the time being appear on the Record of Depositors for the structured warrants.