What is an Investment Warrant?
An Investment Warrant enables you to buy shares in two payments. You pay a fraction of the share price up front and get exposure to the capital movements in the underlying share and all of the ordinary dividends over the life of the warrant.
Generally, the price of an Investment Warrant will move in line with movements in the underlying share and, because warrants are only a fraction of the price of the underlying share, they tend to move in greater percentages than the share price.
Investment Warrants also give you a payment equivalent proportionally to the ordinary dividends of the underlying shares. Investment Warrants therefore allow you to potentially earn a greater return than you might achieve by owning the share itself (see example below).
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Investment Warrants give you:
- the right to buy a share
- at a specific price (called the exercise price)
- on a specific date (called the expiry date)
- the equivalent proportion of the ordinary dividends throughout the life of the warrant
Investment Warrants are listed on the SGX so you can buy and sell them at any time, just like shares.
At the expiry of the warrant you have the option to either pay the exercise price and take delivery of the shares or simply receive the cash settlement amount (if any).
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Benefits of Investment Warrants
- Greater return potential – through the effect of gearing, price movements are magnified
- Longer term exposure – lower holding costs mean Investment Warrants are suitable for both short and long term investments
- No Margin calls - increase your exposure to shares without the risk of margin calls
- Physical settlement – option to exercise and take delivery oft the fully paid shares at expiry
- Enhanced Dividend Yield – holders receive the equivalent proportion of the ordinary dividends of the underlying share for less outlay
Warrants enable investors to spend less up front, diversify their investments, potentially accelerate their growth and meet their investment objectives sooner.
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Who would use Investment Warrants?
You might use Investment Warrants if:
- you are a long-term investor looking for a lower risk way to increase your investment returns
- you are a trader with a positive view on an underlying share and you want a moderately geared alternative
- you are an existing shareholder and want to unlock some capital from your portfolio by switching from shares into Investment Warrants
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How Investment Warrants work
If you believe DBS shares will rise, you may wish to leverage your view by buying Investment Warrants expiring 3 Apr 2009, 1 warrant per share, over DBS shares. A hypothetical example is shown below:
Hypothetical Example 1:
| DBS share price |
$19.50 |
| Exercise price |
$13.50 |
| DBS Investment Warrant |
$6.80 |
| Warrants Per Share |
1 |
| Expiry date |
3 Apr 2009 |
Instead of purchasing the DBS share at $19.50 you can buy the Investment Warrant for only $6.80 to gain exposure to the performance of the DBS shares.
During the life of the DBS Investment Warrant, the warrant price will tend to move up and down in line with the DBS share price. Investors may increase or exit their investment at any time by buying or selling the Investment Warrants on the SGX. The investor will also receive the equivalent proportion of the ordinary dividends paid by DBS throughout this term.
At the expiry, if the investor is still holding the warrant they may either pay the exercise price of $13.50 and take delivery of the DBS shares or they can choose to receive the cash settlement value (if any).
- The cash settlement at expiry is calculated using the following formula:
(Share price - Exercise price) x warrants per share
|
- For example, if DBS is at $24 at expiry the warrant value would be:
($23.50 - $13.50) x 1 = $10.00
|
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Latest Investment Warrants Listed
In response to investor demand, Macquarie listed a new series of Investment Warrants on 18 June 2008. Unlike the earlier launches of Investment Warrants, this new series features a higher ‘warrants per share’ (WPS) number which reduces the initial unit price per warrant.
Hypothetical Example 2:
| DBS share price |
$19.50 |
| Exercise price |
$15.00 |
| DBS Investment Warrant |
$0.32 |
| Conversion ratio |
20 |
| Expiry date |
3 Jul 2009 |
- Thus, if DBS is at $22.50 at expiry the warrant value would be:
($24.50 - $15.00) / 20 = $0.475
|
While the warrant price of the Investment Warrant in example 2 is significantly lower than that in example 1, it must be noted that the higher WPS number also affects the responsiveness (ie. the delta) of the warrant to changes in the underlying share price. Generally, the Investment Warrant with a WPS of 1 (in example 1) will move tick-for-tick (i.e. cent for cent) with the underlying share, the Investment Warrant with a WPS of 20 in example 2 will generally require an 8-tick (i.e. 16 cents) movement in the underlying share before the price of the warrant will change.
Other things that you need to consider about the Investment Warrants with a high WPS number are:
A. Dividend Equivalent Payouts
Investment warrants with a higher WPS also means that investors need to purchase more warrants to be entitled to 1 underlying share and its ordinary dividend equivalent payments. Thus if a company declares an 80 cent net ordinary dividend, you will receive the full 80 cent equivalent payment if you hold the proportionate number of Investment Warrants to entitle you to 1 underlying share. Using the same DBS Investment Warrant with a WPS of 20 for example, if DBS paid a $0.80 ordinary dividend per share, each warrant held by the investor will be entitled to an ordinary dividend equivalent payment of $0.04, (i.e. $0.80/20).
B. Conversion into Physical Shares
A unique feature of Investment Warrants is that at expiry, they give investors the option of receiving cash settlement (if any) or to pay the exercise price and take physical delivery of the shares. Using the same above example, holders of 20 lots of DBS Investment Warrants with a $15.00 strike and WPS of 20 will need to pay $15,000 (15.00 x 20,000/20) to be entitled to receive 1,000 DBS shares. Investors can only physically exercise warrants in multiples of the WPS number. Any remaining warrants held will be cash settled (if any).
All Investment Warrant holders will receive an expiry notice a month before the expiry date, after which they may download a form at warrants.com.sg and make a payment should they choose to convert the warrants into physical shares. The payment needs to be received by Macquarie 9 business days before expiry, after which the physical shares will be credited into the holder's CDP account 5 business days after expiry. For those who opt for cash settlement, the process is automatic. However, do note that like trading warrants, investment warrants that expire out of the money will be worthless and as such have no cash settlement.
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How gearing can boost your return
One of the main advantages of warrants is ‘gearing’, meaning a warrant provides the holder with an increased exposure to the underlying share. Therefore, a small percentage change in the price of the share can lead to a large percentage change in the value of the equity warrant.
The added advantage of Macquarie’s Investment Warrants is the increased effective dividend yield. The holder of an Investment Warrant is entitled to the equivalent proportion of the ordinary dividends in the underlying share, however as the warrant price is only a fraction of the share price the effective dividend yield to the holder is increased.
Here is a hypothetical example:
| |
DBS share |
DBS Investment Warrant (WPS=1) |
| 1 Jan 2008 |
$21.00 |
$7.30 |
| 1 Jan 2009 |
$24.00 |
$9.00 |
| Forecast dividend |
$0.80 |
$0.80 |
| Absolute profit |
$3.80 |
$2.50 |
| Percent return |
18% |
34% |
It’s important to remember leverage works in both directions, so a fall in the share price would also cause a greater percentage fall in the value of the warrant. It is also important to be aware that Investment Warrants will expire worthless if the share price is at or below the exercise price at expiry.
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Using Investment Warrants to release capital from your portfolio
Investment warrants are a convenient and lower risk alternative to release capital from your portfolio. If you have an existing share holding you can switch into a Macquarie Investment Warrant by selling the shares and buying Warrants. By doing so you will maintain exposure to the share movements and dividends while releasing capital for other investments.
Here is a hypothetical example:
| |
DBS shares |
DBS Investment Warrant (WPS=1) |
| Price |
$21.00 |
$7.30 |
| Units |
1,000 |
1,000 |
| Total |
$21,000 |
$7,300 |
| Fund Released |
$0 |
$13,700 |
| Percent return |
18% |
34% |
Advantages of Investment Warrants over other financing facilities
- Ability to leverage above 70%
- Limited downside
- No margin calls
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More information
Contact our warrants desk via phone or email:
Phone: 1800 288 2880
Email: info@warrants.com.sg
*The information provided herein, is produced by Macquarie Securities Singapore Pte Limited (“MSSPL”) (Registration No 198702912C), holder of a capital markets services licence under the Securities and Futures Act, Chapter 289 of Singapore. Any material provided herein, including any indicative terms are provided for information purposes only and do not constitute an offer, a solicitation of an offer, or any advice or recommendation to conclude any transaction.
Macquarie Bank Limited (ABN 46 008 583 542) is the Issuer of the Macquarie Warrants (“Warrants”). Macquarie Bank Limited does not carry on banking business in Singapore. Macquarie Bank Limited does not hold a licence under the Banking Act, Chapter 19 of Singapore and therefore is not subject to the supervision of the Monetary Authority of Singapore in respect thereof.
MSSPL is not an authorised deposit-taking institution for the purposes of the Banking Act (Commonwealth of Australia), and MSSPL’s obligations do not represent deposits or other liabilities of Macquarie Bank Limited. Macquarie Bank Limited does not guarantee or otherwise provide assurance in respect of the obligations of MSSPL.
Warrants can be volatile instruments and may be subject to considerable fluctuations in value. Past performance is not indicative of future performance. Therefore Warrants run the risk of expiring worthless resulting in a total loss of your investment. The issuer makes no representation nor can it give any assurance as to the liquidity in the trading of Warrants as the Designated Market Maker (MSSPL) may be the only person quoting prices in the warrants. You should consult, to the extent necessary, your own independent, competent, legal, financial and other professional advisers, to ensure that any decision you make is suitable for you with regards to your circumstances and financial position.