Warrants Primer

American Exercise Style

Gives the warrantholder the right to exercise at anytime before or on Expiry Date

At-the-money or ATM

• A call warrant is ATM when Underlying Security Price = Exercise Price
• A put warrant is ATM when Underlying Security Price = Exercise Price

Call Warrant

A warrant that gives the holder the right to buy the underlying share for an agreed price, on or before a specified date.

Cash Settlement Amount

If the cash-settled call warrant is In-the-Money, the Cash Settlement Amount upon exercise or expiry shall be:

Cash Settlement Amount	=	Number of Call Warrant	x (	Closing Price	-	Exercise Price	) x	1	x	Settlement Exchange Rate
								Exercise Ratio

If the cash-settled put warrant is In-the-Money, the Cash Settlement Amount upon exercise or expiry shall be:

Cash Settlement Amount	=	Number of Put Warrant	x (	Exercise Price	-	Closing Price	) x	1	x	Settlement Exchange Rate
								Exercise Ratio

Delta

Delta is the ratio of the change in the price of the warrant to the change in the price of the underlying.

Effective Gearing

Effective Gearing is a measure of the actual leverage, which is computed as the theoretical % change in the call warrant price for a 1% change in the underlying security price:

Effective Gearing = Gearing Ratio x Delta

European Exercise Style

Gives the warrantholder the right to exercise only on Expiry Date

Exercise Price

In the case of physically-settled warrants, the Exercise Price is the price at which the warrantholder is entitled to transact the underlying security.

As for cash-settled warrants, the Exercise Price is the price that is used to calculate the Cash Settlement Amount.

Exercise Ratio

Number of warrants in exchange for one (1) underlying security

Expiry Date

The date on which the ability to exercise the call warrants expires.

Gearing Ratio

Gearing ratio measures the exposure of warrants to the underlying security:

Gearing =	Underlying Security Price
	Call Warrant Price x Exercise Ratio

In-the-money or ITM

• A call warrant is ITM when Underlying Security Price > Exercise Price
• A put warrant is ITM when Underlying Security Price < Exercise Price

Intrinsic Value

Intrinsic Value = Underlying Security Price - Exercise Price

Out-of-money or OTM

• A call warrant is OTM when Underlying Security Price < Exercise Price
• A put warrant is OTM when Underlying Security Price > Exercise Price

Premium

Premium measures the percentage over the underlying security price required to break-even upon exercise or on expiry of the warrants:

Premium	=	(Call Warrant Price x Exercise Ratio) + Exercise Price - Underlying Security Price
		Underlying Security Price
	=	(Put Warrant Price x Exercise Ratio) + Underlying Security Price - Exercise Price
		Underlying Security Price

Put Warrant

A warrant that gives the holder the right to sell the underlying share for an agreed price on or before a specified date.

Settlement Exchange Rate

The ratio of Settlement Currency to one unit of Reference Currency, being the currency of the underlying security

Advantages of Warrants

1. Leverage Play

   Ability to invest in the movement of the underlying at a lower cost. The higher the gearing ratio, the higher the leverage

2. Unlimited Upside and Limited Downside

   

3. No margin call
4. Liquidity

   Warrant issuers will ensure the liquidity of the warrant issues during the tenure of the warrants.

Characteristics of Warrants

Warrant prices are influenced by

1	Underlying Security Price	Call Warrant Price	Put Warrant Price
2	Risk-free Rate	Call Warrant Price	Put Warrant Price
3	Exercise Price	Call Warrant Price	Put Warrant Price
4	Dividends	Call Warrant Price	Put Warrant Price
5	Volatility	Call Warrant Price	Put Warrant Price
6	Tenure	Call Warrant Price	Put Warrant Price