What are warrants?
A warrant is a powerful investment tool that enables you to gain exposure to a security for a fraction of its price. Warrants can be used to either increase or decrease your level of risk and, unlike ordinary shares, they can be used to profit from both a rise and fall in asset price.
Macquarie Warrants are available over individual shares or indices, they are listed on the SGX and can be bought and sold like ordinary shares.
How warrants work
A warrant gives the holder the opportunity to buy or sell a share at a future date for a fixed price. The two basic types of Warrants are "Call Warrants" and "Put Warrants". Call Warrants give investors the potential to profit from share price rises. Put Warrants give investors the potential to profit from share price falls.
A Call Warrant gives the holder the right, but not the obligation, to buy the underlying share for a fixed price known as the "exercise price" at a future date or, in the case of a cash settled warrant to receive a cash settlement amount reflecting the amount by which the share is above the exercise price. Taking up this right is know as "exercising" the warrant.
A Put Warrant gives the holder the right, but not the obligation, to sell the underlying share to the Warrant Issuer for the exercise price or, in the case of a cash settled warrant to receive a cash settlement amount reflecting the amount by which the share price is below the exercise price.
NOTE: This is a hypothetical example.
- The graph shows the percentage change in the value of a hypothetical share compared with the value change in a call warrant and a put warrant. It illustrates the increased exposure to share price movements which warrants provide.
- During a 100 day investment period, the underlying share price falls by 10% (at Point A) and increases by 8% (at Point B).
- The share price varies over an 18% range during the investment period. In contrast, the call warrant fluctuates within approximately a 75% range of the purchase price.
- The put warrant also fluctuates within approximately an 80% range during the investment period but in an opposite direction to the call warrant.
Exercise Price
The agreed price is known as the exercise price. This is the price at which a warrant holder may buy or sell the underlying shares or the price used in determining the cash settlement amount.
A call warrant is said to be out-of-the-money when the exercise price is higher than the share price and in-the-money when the exercise price is lower than the share price.
A call warrant will be worthless if the share price is lower than the exercise price on the expiry day. However, with upward movements in the share price, the holder can still earn excellent returns trading the warrant prior to the expiry date.
The opposite occurs for a put warrant. It will be in-the-money when the exercise price is above the share price and out-of-the-money when the exercise price is below the share price. With downward movements in the share price, the holder can make profits trading the put warrant prior to its expiry date.
Exercise style and expiry date
There are two styles of exercise for warrants - American and European. An American style warrant allows holders to exercise their warrants at any time up to and including their expiry date.
European style warrants allow conversion only on the expiry date.
Investors should also note the exercise amount of a warrant. This is important in determining the quantity of warrants needed to be exercised to buy or sell one underlying share.
Warrants may be Cash Settled. They are usually European in style (that is they may not be exercised prior to expiry) and investors are given a cash amount equivalent to the amount the warrant expired "in-the-money." If for example a given warrant had a strike price of $10.00 and the stock price at expiry was $12.00 then the investor would receive $2.00 per warrant (assuming the exercise amount was one warrant for one share).
Note: All Macquarie warrants currently listed on the SGX are 'European' in style and 'cash settled'.