Changes to the Singapore Exchange ("SGX") listing rules that were made in late 2003 now require warrant issuers to appoint a Designated Market Maker (“DMM”) to provide liquidity in warrants. Before these changes warrants were often illiquid, making it difficult to buy and sell. The appointment of a liquidity provider means it is easier for you to buy and sell warrants at any time. Macquarie’s expertise is in providing you liquid markets.
Gearing
Warrants cost only a fraction of the price of shares. However, they can provide investors with greater exposure to share price movements as their prices generally rise and fall more steeply than shares in percentage terms. This increased exposure can subsequently offer greater potential profit as a percentage of the capital invested.
Conversely warrants also expose investors to greater potential loss in percentage terms. However, you are never obliged to pay anything more than the initial price of the warrant, so the maximum amount you can lose is limited to the price paid.
Our hypothetical example in the pricing variables page illustrates the relative price movements of a call warrant and a put warrant against corresponding movements in the underlying share price.
No margin calls
Even if the underlying share or index moves adversely, warrant investors cannot be asked by the issuer to make margin calls.
Contra trading
Some stockbrokers may allow investors to trade warrants on Contra thus increasing leverage to share price movements. Investors should be aware of the higher degree of risks involved in this strategy.
Low transaction costs
Generally brokerage and associated transaction costs are reduced when trading warrants because the price of Warrants is usually less than the underlying share price.
Ease of trade
Warrants are traded on the SGX allowing investors to buy and sell warrants just like shares.
Portfolio Protection
Warrants can be used as a form of insurance to protect an existing share portfolio against a falling market. An investor with a holding in a particular stock who was nervous about the future direction the market could purchase put warrants instead of selling shares. This would allow the investor to retain share ownership without realising capital gains and without having full exposure to the downside risks. Investors should, however, understand the complexity of utilising Warrants for hedging or portfolio protection purposes. For example, the value of the Warrants may not exactly correlate with the value of the underlying share.
Hedging
Call Warrants can be used to hedge against future price increases. An investor interested in purchasing shares who did not have immediate access to funds could purchase call warrants to capture the benefits of an anticipated price rise. This would allow the investor to establish a price (the exercise price) from which they have exposure to the shares in the future.
Releasing share capital
Call Warrants can also be used to free up capital invested in shares. An investor may sell existing share holdings and purchase a corresponding number of Call Warrants for a fraction of the price. The investor has maintained exposure to share prices while releasing capital from the security holding.