STRUCTURED WARRANTS
Structured Warrants This booklet explains the general characteristics and risks of structured warrants traded on the Singapore Exchange (“SGX”). Investors should read carefully the contents to understand the nature and risks of structured warrants. Structured warrants may differ in their investment objectives and risk profiles. Hence, it is important to distinguish between them. For more details on a particular warrant issue, investors are advised to read the listing documents and term sheet prepared by the issuer before investing in the structured warrant. Information on warrants are available from your broker and on SGX website at www.sgx.com
Structured Warrants Contents What you need to know before you invest 1 What is a warrant? What is a structured warrant? What is a collateralised structured warrant? What is a non-collateralised structured warrant? What is a company warrant? What are the differences between a company warrant and a structured warrant? Some examples of structured warrants traded on SGX Equity warrants Index warrants Basket warrants Yield enhanced warrants Barrier warrants
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Explanatory terms for the investor Common terms of a structured warrant issue Some technical warrant terms
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Why invest in structured warrants What are the advantages of investing in structured warrants?
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What are the risks you need to know What are the risks in trading warrants?
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How to invest in structured warrants 17 How do you buy and sell listed structured warrants? How do you exercise structured warrants? Factors affecting the price of a warrant What determines the price of a warrant?
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Issuing structured warrants Who issues structured warrants? Steps in issuing a structured warrant What are the obligations of an issuer? What is market making?
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Corporate action adjustments What are corporate action adjustments for warrants?
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Warrant trading strategies What are the basic warrant trading strategies?
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Glossary of terms
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Structured Warrants What you need to know before you invest What is a warrant? A warrant is a security and a type of option. •
A call warrant gives the holder the right or choice to buy a given quantity of the underlying asset at a predetermined price (exercise or strike price), on or before a particular date, depending on the exercise style of the warrant.
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A put warrant gives the holder the right to sell a given quantity of the underlying asset at a predetermined price, on or before a particular date, depending on the exercise style of the warrant.
Warrants have a fixed tenure and, if not exercised, are worthless after their expiry date. What is a structured warrant? A structured warrant is issued by a third party financial institution on the shares of an unrelated company, a basket of companies’ shares or an index. What is a collateralised structured warrant? A structured warrant is collateralised if the issuer deposits the underlying securities with an independent trustee, custodian or depository approved by the Exchange on terms that adequately protect the interests of the warrant holders. What is a non-collateralised structured warrant? A structured warrant is non-collateralised if the issuer provides for its obligations in a form other than by way of charge over the underlying securities. The issuer usually adopts hedging strategies to provide for its obligations during the life of the warrant. What is a company warrant? A company warrant is issued by a company to give warrant holders (usually existing shareholders) a right to buy a given quantity of the company’s shares at a predetermined price, on or before a particular date. If exercised, the company issues new shares which results in a dilution of earnings per share.
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Structured Warrants
What are the differences between a company warrant and a structured warrant? Company warrants
Structured warrants
Issued by
Listed company
Third party financial institution
Underlying share
Shares issued by the listed company
Any company shares (determined by issuer) that is not related to the financial institution.
On exercise Company will issue additional shares to meet obligations. This results in share dilution.
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Does not result in dilution of the underlying share.
Structured Warrants Some examples of structured warrants traded on SGX Equity warrants These are warrants issued on equity securities (e.g. listed company shares). The underlying shares may be listed on SGX or an acceptable stock exchange. If you hold an equity call warrant, you will gain when the current share price rises above the warrant exercise price. You can exercise the warrant to buy the shares from the issuer at the exercise price instead of the current market price. The gain is the difference between the exercise price and the current share price. Alternatively, you can gain by selling the call warrants as the market price of the warrants would have increased with the rise in the underlying share price. An equity put warrant works in the opposite way as you only gain when the share price of the stock falls. You will gain when the current share price falls below the warrant exercise price. You can exercise the warrant to sell the shares to the issuer at the exercise price instead of the current market price. The gain is the difference between the exercise price and the current share price. Alternatively, you can gain by selling the warrants as the market price of the warrants would have increased with the fall in the underlying share price. Index warrants The value of an index warrant is linked to the performance of the benchmark index. An index is usually expressed in numerical figures and the exercise level is expressed in points. •
A call index warrant gives you the right to buy a given quantity of the underlying index from a third party issuer at a predetermined price, on or before a particular date, depending on the exercise style of the warrant.
•
A put index warrant gives you the right to sell a given quantity of the underlying index to the third party issuer at a predetermined price, on or before a particular date, depending on the exercise style of the warrant.
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Structured Warrants
What are some benefits of index warrants • Allows you to take a position in the market without having to go through the hassle of trading in individual stocks. • Lower trading cost compared to investing in portfolio of component stocks. • Affordability – Index warrants are generally priced within the reach of retail investors. In contrast, an index based portfolio of component stocks may be too large an investment outlay for most retail investors. What happens when you exercise your index warrant? Generally, index warrants are settled on exercise via a cash payment. The amount of cash you receive is generally calculated by multiplying the difference between the exercise level and the current index level by a multiplier to convert the points to cash. The multiplier is determined by the issuer of the particular warrant. Example Issue date Underlying asset Warrant type Expiry date Exercise level Multiplier Exercise style Settlement
1 February 2001 Component stocks equivalent in value to ABC index Call warrant 30 November 2001 1200 points $0.01. This means one index point equals one cent. American Cash settlement
In this example, if the index is at 1500 points and you elect to exercise the warrant, the issuer will make cash payment equals to (1500-1200) x $0.01 or $3.00 for each warrant.
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Structured Warrants
What are the differences between an index warrant and index option? •
Length of maturity Index warrants are usually issued with tenures of nine months to two years while index options are usually issued with tenures at three-month maturity.
•
Margin An investor has to pay the full price of an index warrant purchased on the stock exchange. For index option purchased on a futures exchange, the investor only needs to put up the required margin for the open position. This margin will usually be marked to market according to the rules of the futures exchange on the life of the option.
What are the advantages of an index warrant over an index futures? •
Loss is capped For an index warrant, your exposure is limited to the warrant price. In the case of index futures, your exposure could be substantial and unlimited if the market moves in an unfavourable direction from your position.
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Convenience An index warrant is fully paid upon purchase. On the other hand, index futures involve margin payment and marked to market requirements.
Basket warrants The value of a basket warrant is linked to the performance of a predefined basket of shares. The component shares of the basket may be related by industry or sector. For example, an issuer may issue a basket warrant based on bank shares. Such warrants are useful for investors who are willing to take a view on a sector but lacks the knowledge to identify the best performing stock. A basket warrant may be settled by physical delivery of the basket components or via cash settlement.
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Structured Warrants
Yield enhanced warrants Yield enhanced warrants is designed to provide investors with enhanced return on invested capital compared to the risk-free interest rate offered by money market products. Unlike traditional call and put warrants which focus on capital gains, yield enhanced warrants attempts to provide yield enhancement to the investor. The cash settlement amount of the warrant is linked to the market price of the underlying share. At maturity, if the closing price of the share on expiration (at valuation date) is at or above the exercise price, a warrant holder will receive a cash settlement amount equal to the exercise price. If the closing price of the share on the valuation date is below the exercise price, a warrant holder will receive a cash settlement amount equal to the closing price of the share on the valuation date. Yield enhanced warrants normally have a time to expiration of less than one year. Example Issue date Issue price Reference price Underlying asset Exercise price Expiry date Conversion ratio Exercise style Settlement
1 March 2002 $3.15 (86% of reference price or 95% of exercise price) $3.66 ABC company shares $3.30 (90% of the reference spot) 31 May 2002 One warrant to One share European Cash settlement
On expiration of the warrant, if the closing price of ABC share is above or equal to $3.30, the investor will receive $3.30 per warrant. However, if the closing price is of the share is $3.20 (less than the exercise price of $3.30), the investor will receive $3.20, an amount equivalent to the closing price. In this case, the investor still makes a net gain of $0.05 per warrant. However, if the closing price falls below $3.15, the investor will suffer a loss.
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Structured Warrants
Barrier warrants Barrier warrants are similar to equity warrants. The difference is that barrier warrants have an additional feature - a barrier price on the underlying asset. The barrier price will be specified at the launch of the warrant. If the price of the underlying asset crosses the barrier price before the expiration date of the warrant, it will trigger a number of different outcomes, depending on the specific type of barrier warrant. For example, it may cause the warrant to expire immediately (before the expiration date of the warrant). Compared to ordinary equity warrants, barrier warrants offer a higher level of leverage, a limited trading range, lower cost and a higher level of risk. It allows the investor to trade based on his view of how a share price will move in a specific range over the life of the warrant.
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Structured Warrants Explanatory terms for the investor Common terms of a structured warrant issue Warrant issuer The party that issues the structured warrants. The issuer is also the party who is obliged to make or receive delivery of the underlying asset (or cash) when the warrant is exercised. Size of issue This is the total number of warrants that can be issued under a particular listing document. Exercise or strike price The price at which the holder is able to buy or sell the underlying asset. A call warrant holder is able to exercise his right and buy the underlying asset from the issuer at the exercise price. On the other hand, a put warrant holder is able to exercise his right and sell the underlying asset to the issuer at the exercise price. Issue or warrant price The issue price or the warrant price is the price at which the structured warrant is sold by the issuer to the holders. Expiry date The expiration date of the structured warrant. Any structured warrants not exercised after the expiration date are worthless. Exercise style Warrants are usually either American or European exercise style. American exercise style allows the holder to exercise the warrants at any time before their expiry. European exercise style allows the holder to exercise the warrants only at the expiry date. Some issuers of European style warrants provide automatic exercise of warrants that are in-the-money on expiration date on behalf of holders. Warrants per share or conversion ratio The number of warrants needed to be exercised to buy or sell one unit of the underlying share.
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Structured Warrants
Warrant exercise A call warrant is exercised when you exercise your right to buy the underlying asset from the issuer at the exercise price. A put warrant is exercised when you exercise your right to sell the underlying asset to the issuer at the exercise price. Underlying instrument Warrants derive value from the underlying instrument. The underlying instrument maybe a company’s shares, a basket of companies’ shares or an index. Physical delivery or Cash settlement Warrants may be settled by physical delivery of shares or by cash. Upon exercise of the warrant, depending on whether the warrant is a call or put, the holder can expect to deliver to, or receive from, the issuer the underlying share (or cash). The settlement style is made known when the warrant is issued. Intrinsic value The difference between the exercise price of a warrant and the market price of the underlying asset. Only in-the-money warrants have intrinsic value. In-the-money When the exercise price of a call warrant is below the current price of the underlying security, the warrant is said to be inthe-money. When the exercise price of a put warrant is above the current price of the underlying security, the warrant is said to be in-the-money. At-the-money When the exercise price of the warrant, either call or put warrants, is equal to the current market price of the underlying security, the warrant is said to be at-the-money. Out-of-the-money When the exercise price of a call warrant is above the current market price of the underlying security, the warrant is said to be out-of-the-money. When the exercise price of the put warrant is below the current market price of the underlying security, the warrant is said to be out-of-the-money.
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Structured Warrants
Some technical warrant terms Premium Premium is expressed as a percentage of the underlying share price. By definition, premium is the percentage by which the underlying share price needs to have moved at maturity for the investor to break even. The premium for a call warrant is calculated as follows: Premium (%) = [(Warrant price + Exercise price - Share price) / Share price] x 100 Gearing Structured warrants are usually priced at a fraction of the share price. This allows you to trade more warrants than the underlying asset for the same investment outlay. Trading warrants therefore, offer benefits of gearing. For instance, a small percentage gain in the underlying share price may lead to a larger percentage gain in the value of the call warrants. Conversely, a fall in the price of the underlying share may lead to a larger percentage loss in the value of the warrants. Hypothetical example ABC Company Share price = $10.00 Warrant price = $1.00 Investment period = 2 months 2 months later Decrease in No change in Increase in share price share price share price $9.00
ABC company share price
% change in ABC (10%) share
$10.00
$11.00
0%
10%
Warrant price
$0.50
$0.85
$1.40
% change in warrant price
(50%)
(15%)
40%
Gearing ratio =
Share price Warrant price x n
n: conversion ratio 10
Structured Warrants
The table shows that when ABC company’s share price increases by 10% (from $10.00 to $11.00), the call warrant’s price rises by 40% (from $1.00 to $1.40). If the investor has invested in the shares, he would have paid $10.00 to obtain a 10% gain. By investing in warrants, the investor only pays $1.00 to obtain a 40% gain! Conversely, when ABC company’s share price decreases by 10%, the call warrant’s price falls by 50% (from $1.00 to $0.50). This shows that gearing works in the opposite direction as well. When ABC company’s share price remains unchanged at $10.00, the warrant price falls by 15%. This is due to time decay of the warrant. Delta The delta of a warrant is the rate at which its price changes with respect to changes in the price of the underlying asset. Call deltas are always positive and put deltas are always negative. Example: • At-the-money warrants have a delta of around 0.5. This means that a one cent change in the value of the underlying asset will result in a 0.5 cent change in the value of the warrant. •
Options which are deeply in-the-money have a delta of close to 1. In other words, a one cent change in the value of the underlying asset will result in a one cent change in the value of the warrant.
For investors, the concept of delta is important when deciding on the strike price of a warrant. Investors expecting a small move in the price of the underlying asset should buy warrants which are at-the-money or slightly in-the-money while investors expecting a large move can buy out-of-the-money warrants.
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Structured Warrants
Effective gearing Effective gearing of a warrant is calculated simply by multiplying the delta of a warrant by its gearing. Example: Share price = $10.00 Warrant price = $1.00 Delta = 0.5 (or 50%) Simple gearing is 10/1 = 10x Effective gearing is 10/1 x 0.5 = 5x An increase in the share price of 10 cents will cause the warrant price to increase by 10 cents x 0.5 = 5 cents. In other words, a 1% increase in the share price results in a 5% increase in the warrant price illustrating its effective gearing of 5x. Call warrants with high strike prices provide more gearing but are not appropriate if only a small price move is expected. In general, the strike price chosen should be between the current share price and the expected share price. The maturity of the warrants should be carefully chosen to avoid excessive time decay loss. Implied volatility Implied volatility is the volatility implicit in the market price of the warrant. Implied volatility can also be looked at as a measure of risk. The higher the volatility of the underlying shares, the more expensive a warrant is. Implied Volatility = function of {share price, warrant price, strike price, maturity, interest rate and dividend yield}
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Structured Warrants Why invest in structured warrants What are the advantages of investing in structured warrants? This section outlines the benefits of investing in traditional warrants. Given the different types of warrants available in the market, investors are advised that the benefits stated here may not be applicable for all warrant types. For example, yield enhanced warrants which offers yield enhancement may not provide most of the benefits stated here. Small investment outlay A warrant allows you to acquire an exposure to a desired stock at a fraction of the cost of the stock, which is the warrant price. This exposure is however, only for a limited time based on the time life or maturity of the warrant. Unlimited upside but limited downside The maximum potential loss to you is the entire warrant price, which is usually a fraction of the share price. For a call warrant, this occurs when the current share price is less than the exercise price at warrant expiration, making the warrant worthless. On the other hand, the potential gain of a warrant maybe unlimited as it depends on the upside movements of the underlying share. Protects the value of your asset A put warrant allows you to hedge against a fall in the price of a stock in your portfolio. When the current market price of a share falls below the warrant exercise price, you can exercise the warrant to sell the shares to the issuer at the exercise price. You are, therefore, assured of a minimum value equivalent to the exercise price for the stock in your portfolio. Gearing Warrants offer the benefits of gearing. Warrant prices are usually a fraction of the total value of the underlying asset. This allows you to trade more warrants than the underlying asset for the same investment outlay. Movements in the price of the underlying asset may lead to magnified gains or losses on the warrant via gearing (see section on gearing on page 10).
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Structured Warrants
Time to decide Warrants allow you to gain an exposure to the underlying asset without committing your resources to investing in the asset. This allows you to lock in the price of the underlying asset, and give you till the maturity of the warrants to decide whether to invest directly in the underlying asset. Releasing capital for other investments Call warrants may be used to free up capital invested in shares. By selling existing share holdings and purchasing a corresponding number of call warrants for a fraction of the price, you can maintain exposure to the underlying share price increase while releasing capital from holding the shares.
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Structured Warrants What are the risks you need to know What are the risks in trading warrants? While SGX provides the infrastructure for warrants to be traded, neither SGX nor its subsidiaries in any way guarantee the performance of the warrant issuer or the warrants issued. Credit risk Credit risk is the risk that the warrant issuer will not be able to fulfill its obligations. This occurs on the exercise of the warrant. Therefore, it is essential that when you purchase a warrant, you should assess the credit risk associated with the warrant issuer. Warrant issuers may not be covered by margins or other forms of security lodged with SGX or any other party in order to cover the warrants. Some issuers may reduce this credit risk by collateralising the warrant issue. This is done by placing the underlying assets with a trustee, in an arrangement to meet its obligations under the warrant. Index warrants may not be covered as the issuer may not have placed the underlying assets with a trustee. Instead the issuer may hedge its warrants’ exposure via a futures trade in the opposite direction. The funds of the warrant issue received by the issuer are generally mingled with the issuer’s assets. This creates a risk to investors as these funds are not segregated for investors’ benefit in the event of the issuer’s default. You may evaluate the credit worthiness of the issuer and its guarantor (if applicable) from published information on their financial situation which will be included in the listing document. You may also wish to refer to a credit rating agency such as Moody’s or Standard and Poor’s on the credit rating of the issuer.
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Structured Warrants
Liquidity risk Liquidity risk is the risk that a warrant holder will not be able to sell his warrants for a reasonable price in the market. This is due to insufficient buy orders which affects the market price of the warrant. Market risk Similar to other investments in the securities market, the market value of a warrant is susceptible to events that affect its demand and supply. Hence, the market value of your investment will fluctuate accordingly. Default on market making obligation An issuer who has committed to make a market in a warrant issue may not fulfill its obligation due to unforeseen circumstances that may arise. Hence, a warrant holder may experience liquidity risk despite a commitment from the issuer to make a market. Limited life of warrants Warrants have an expiry date and therefore a limited life. As time passes, the time value of a warrant decreases and eventually reaches zero when the warrant expires. This is known as time decay. A warrant may expire before your expectations are realised, making it worthless. Therefore it is essential that you select a warrant that has sufficient time to expiry to match your market expectations. Extraordinary event The warrant issuer may declare a lapse of the warrant or bring forward the expiry date. This arises out of certain circumstances such as the delisting of the underlying asset. These circumstances are outlined in the terms and conditions of the warrant issue.
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Structured Warrants How to invest in structured warrants How do you buy and sell listed structured warrants? Structured warrants are traded and settled in the same way as company warrants and shares listed on SGX. You can buy and sell listed structured warrants on the SGX securities market through your broker or your online trading account. You will receive a contract statement similar to the contracts for share trading. How do you exercise structured warrants? The procedures for the exercise of structured warrants are outlined in the terms and conditions of the warrants issue. To exercise a structured call warrant, you will need to submit an exercise notice together with cash payment to the warrant agent. The warrant agent will then inform the Central Depository (Pte) Ltd (“CDP”) and the issuer of the exercise. Following this, CDP will debit the warrants from your securities account and credit the underlying shares into your account. Some warrants issues, however, allow for automatic exercise of the warrants. Under such a scenario, the investor need not submit an exercise notice nor make any upfront payment for the exercise price and exercise expenses. The amount will be deducted from the cash proceeds paid to the investor. To exercise a structured put warrant, you will similarly need to submit an exercise notice to the warrant agent and advise CDP to debit the underlying shares from your securities account and transfer them to the issuer’s account. Following this, the warrant agent on behalf of the issuer will make out the cash payment to you.
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Structured Warrants
For cash settled warrants (both call and put warrants), the issuer will settle the warrant exercise in cash by instructing the warrant agent to pass the cash settlement amount to you. The proceeds are calculated by the difference between the market price of the underlying share and the exercise price. The market price is calculated based on the formula for the cash settlement price as set out in the terms and conditions. Example Issue date
1 February 2000
Underlying asset
Ordinary shares in XYZ company
Warrant type
Call warrant
Expiry date
30 November 2000
Exercise price
$3.50
Exercise style
American
Warrants per XYZ share
1
In this example, assume that the average closing price of the underlying share is at $4.20 and you elect to exercise the warrant. If the issuer has specified physical settlement, then the issuer will deliver one XYZ share to you at the exercise price of $3.50. Alternatively, if the issuer has specified cash settlement, then a cash payment equal to $4.20 less $3.50 or $0.70 for each warrant will be paid to you. Exercise expenses is payable by you to the warrant agent and is deductible from the cash settlement amount.
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Structured Warrants Factors affecting the price of a warrant What determines the price of a warrant? There are six main factors which determine the fair value of a warrant. They are: • the underlying asset price • the exercise price of the warrant • the volatility of the underlying asset price • the time to expiry of the warrant • interest rate • the dividend yield of the underlying asset. Underlying asset price A warrant is essentially a derivative on the underlying share. Assuming other factors remain constant, a call warrant should benefit from the upside movement of the underlying share, and the vice versa is also true for a put warrant. Exercise price A high exercise price will reduce the probability of a call warrant holder exercising the warrant while a low exercise price will increase that probability. A call warrant with a high exercise price should generally be priced lower than one with a low exercise price. In contrast, a low exercise price will reduce the probability of a put warrant holder exercising the warrant while a high exercise price will increase that probability. A put warrant with a low exercise price should generally be priced lower than one with a high exercise price. Volatility of the underlying asset price The higher the volatility or variability of the underlying share return, the more valuable is the warrant. This is because a high volatility in the share return will imply a greater probability of the share price movement in favour of the warrant holder. Time to expiry The longer the time to expiry, the greater the probability that the underlying share will move in favour of the warrant holder. The value of a warrant, therefore, increases with its period to expiry and loses its value as time passes by. This relationship is however, not direct, hence, the decay of a warrant’s value through time is not constant.
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Structured Warrants
Interest rate In general, the higher the interest rate, the higher the cost of holding an asset. When an investor buys the shares, he has to pay for the purchase and the payment will be comparatively higher compared to buying the warrant. However, if the warrant is correctly priced, buying the warrant does not necessarily save the investor from interest costs. Dividends A high dividend yield does not necessarily make a call warrant less attractive relative to holding shares. On an adjusted basis, a correctly priced warrant will factor in dividend yield assumption. In general, the higher the dividends, the lower the price of a call warrant. Using the same argument, high dividend yields raise the price of put warrants.
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Structured Warrants Issuing structured warrants Who issues structured warrants? Structured warrants are issued by third party financial institutions that possess the necessary experience, capital and credit rating. Steps in issuing a structured warrant Listing requirements The requirements for listing structured warrants are set out in Chapter 5 of the SGX Listing Manual. The prospective third party issuer must fulfill the stated requirements before they are eligible to issue warrants. The Listing Manual can be found on the SGX website at www.sgx.com. Admission to listing and quotation status on SGX When applying for the listing of structured warrants, an issuer must submit an indicative term sheet to SGX for consideration. If SGX has no objection to the issue, it will grant approval-inprinciple for the listing and quotation of the structured warrants on SGX. Listing document The issuer must issue a listing document for each warrant issue. The listing document will set out information on the terms and conditions of the warrant and the warrant issuer’s capacity to fulfill its obligations. Investors are advised to read and understand the relevant listing document before investing in a particular warrant. This is to ensure that investors are aware of the terms and conditions of the warrant including their rights and obligations. What are the obligations of an issuer? The listing document will contain the terms and conditions of the warrant, which spells out the contractual rights, and obligations of both the issuer and the warrant holder. What is market making? Under the listing requirements, issuers who commit to make a market for their warrants issues do not need to comply with the minimum placement and holder size requirement, and the minimum issue size requirement is reduced from S$5 million to S$2 million. The listing document will state whether the issuer has committed to make a market in the warrant issue. By committing to make a market, the market maker is obligated to provide competitive bid and ask prices for the warrant. This enhances liquidity in the warrant issue. 21
Structured Warrants Corporate action adjustments What are corporate action adjustments for warrants? Share warrants are subject to adjustments to take into account any corporate actions arising from the underlying stock. Corporate actions such as rights issue, bonus issue, share splits or consolidation may lead to a diluting or concentrative effect on the theoretical value of the underlying stock. This may result in adjustments to the entitlement, the exercise price or other variables of the warrant. For index warrants, adjustments are normally not required on the warrant terms for corporate actions involving the component stocks of the index upon which the warrant is based. This is because the underlying index will have already adjusted itself to take into account such corporate actions.
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Structured Warrants Warrant trading strategies What are the basic warrant trading strategies? Outright warrant buying The outright purchase of a warrant refers to a warrant purchase that is not hedged by anything else, such as the sale of the underlying asset. In most cases, an investor who wants to gain and increase exposure on the underlying asset will employ this strategy. Cash extraction/switching Involves simultaneously selling the current shareholding and buying the call warrant on that particular underlying asset. By buying the warrant this way, investors can still maintain the same effective exposure of the underlying asset. Arbitrage Arbitrageur or trader will take advantage of the pricing discrepancies either between different warrants or by buying the warrant while short-selling the underlying asset. This way, the arbitrageur/trader can limit the downside risk but is still able to generate a profitable trade.
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Structured Warrants Glossary of terms American style American exercise style allows the holder to exercise the warrants at any time before their expiry. At-the-money A warrant is at-the-money when the market price of the underlying asset equals the exercise price of the warrant. Call warrant Contract giving the holder the right to buy a given quantity of the underlying asset at a predetermined price, on or before a particular date. Collateralised structured warrant Warrant where the third party issuer has placed the underlying securities of a particular warrant issue into a trust. European style European exercise style allows the holder to exercise the warrants only at the expiry date. Exercise price The strike price level at which the holder is able to buy or sell the underlying asset. Expiry date The date on which trading in the warrant ceases and the right to exercise the warrant lapses. Extraordinary event A situation that leads to the warrant lapsing prior to expiry. Hedge A transaction which reduces or offsets the risk of a current holding. A put warrant may act as a hedge for a current holding in the underlying asset. In-the-money A call warrant is in-the-money if the market price of the underlying asset is above the exercise price of the warrant, a put warrant is in-the-money if the market price is below the exercise price of the warrant.
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Structured Warrants Glossary of terms Intrinsic value The difference between the exercise price of a warrant and the market price of the underlying asset. Only in-the-money options and warrants have intrinsic value. Listing documents Documents prepared by the warrant issuer. It provides information to enable investors to assess the terms and conditions of the warrant and the warrant issuer’s capacity to fulfill their obligations. Out-of-the-money A call warrant is out-of-the-money if the market price of the underlying security is below the exercise price of the warrant, a put warrant is out-of-the-money if the market price is above the exercise price of the warrant. Put warrant Contract giving the holder the right to sell a given quantity of the underlying asset at a predetermined price, on or before a particular date. Terms and conditions of issue Terms issued by the warrant issuer in conjunction with the listing document and sets out the contractual arrangements between the warrant issuer and the warrant holder. Underlying asset The underlying security or instrument (e.g. shares, commodities, indices) from which the warrant gains its value and which the warrant holder has the right to buy or sell or against which an amount of money is paid. Volatility Refers to the size and frequency of market fluctuations in the price of the warrant or underlying share. Warrant holder The holder of a warrant. Warrant issuer The institution which issues the warrant.
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Structure Warrant
STRUCTURED WARRANTS
Disclaimer Neither this document nor any information or opinion herein constitutes an offer, solicitation or invitation to make an offer to buy or sell any securities or any options, futures or other derivatives related to securities or any other financial instrument ("financial instruments"). SGX, its subsidiaries and their respective affiliates may deal in financial instruments in the usual course of their business, and may at any given time be on the opposite side of trades by investors and market participants. This document is for general circulation and provides information of a general nature only. It does not have any regard to the specific investment objectives, financial situation or individual needs of any particular person receiving this document. Investors should seek advice from a professional financial adviser regarding investing in any financial instruments or adopting any investment strategies discussed in this document. The material in this document is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness assured. Examples are used for illustrative purposes only and do not constitute investment advice. Statements regarding future prospects may not be realised. The value or price of, or income from, any financial instruments referred to in this document may fluctuate and may be affected by changes in exchange rates. Accordingly, investors may receive back an amount that is less than the amount originally invested, or may lose the entire principal amount invested. Past performance is not necessarily a guide to future performance. Any investments discussed herein may involve significant risk, may be illiquid and may not be suitable for all investors.