A Structured Warrant (SW) is an exchange-traded derivative that gives the holder the right but not the obligation to buy or sell the specific underlying asset at an agreed price (exercise price) on the expiry date.

• A call warrant gives investors the right, not the obligation to buy the underlying asset. Typically, the price of a call warrant increases as the underlying asset price goes up.
  
  
• A put warrant gives investors the right, not the obligation to sell an underlying. Typically, the price of a put warrant increases as the underlying asset price goes down.

Structured warrants are available over a range of assets, including shares and share indices.

Company warrants are call warrants issued by companies (with their own stock as the underlying) for the purpose of raising capital. Companies are not required to appoint market makers for the warrants they issue over their own stock. This type of warrants is considered to be suitable for long-term investment and are generally held until expiry by investors.

Structured warrants are instruments issued by third-party financial institutions (issuers). Under SGX Listing Rules, issuers must appoint market makers for the warrants they issue. Structured warrants listed on the SGX are designed as a trading tool and are usually not to be held until expiry.

The role of market makers is to provide continuous buy and sell quotes in the warrants they are designated for. In doing so, the market makers aim to provide a liquid market for the warrants so that investors can buy and sell the warrants without difficulty during normal trading hours.

Investors can sell and then buy back warrants within the day. However, when warrant investors fail to cover the short-sale by the end of the trading day and are unable to fulfil their delivery obligations, they will be subject to the buying-in by the CDP on settlement date. Warrant investors who are subject to the buying-in by the CDP can call the Macquarie toll-free hotline 1800-288-2880 to request for a quote in the buy-in market.

Warrant investors who are bearish or who wish to protect themselves against a fall in the price of the underlying may consider buying put warrants instead.

Besides the underlying price, several other factors could also affect the movement of warrant price. Typically, when the underlying price moves and the warrant price does not move, it could be due to:

• Low delta — when a warrant is deep “out-of-the-money”, the warrant has a low delta which means a large movement in the underlying price is required to change the warrant price.
  
  
• Time decay — the warrant value will decrease as the warrant approaches maturity. The decay in time value may offset some or all of the gains caused by movement of the underlying price.
  
  
• Implied volatility – a drop in implied volatility will decrease the warrant price; a rise in implied volatility will increase the warrant price.
  
  
• Warrants per share — a warrant with a higher warrants per share figure tends to be less sensitive to the underlying price move as compared to a similar warrant with a low warrants per share.

Click on the above terms for a more detailed understanding on them.

The most accurate way to track warrant price change is to compare bid prices over a period of time. All the price changes quoted by Macquarie follow this convention. Other brokers and information providers may publish the “daily price change” by comparing the last traded price with the previous closing price.

Unlike shares and stock indices which are usually frequently traded, the last trading price of a warrant may have happened days or weeks ago and therefore differ significantly from the current value of the warrant. In such cases, the last traded price of a warrant may not reflect the current best bid and offer price of the warrant. Hence, the most accurate way of measuring warrant price changes is to compare the change in bid prices over a period of time.

The market maker generally endeavours to keep tight spreads on warrants. However, there are some instances where market makers will/may widen spreads.

• The warrant is deeply “in-the-money” or “out-of-the-money”, with very high or low delta respectively. The directional risk associated with such warrant is very high. A widened spread is a signal from the market makers to investors to take caution when trading in such risky warrants.
  
  
• The inventory of the warrant is running low and the issuer may not be able to issue more of the warrants to sell to investors.
  
  
• If the issuer has sold a significant amount of warrants in a particular underlying asset, resulting in an overly large risk position.

The live matrix is a direct feed from Macquarie’s market making system, showing investors exactly where the market maker’s bid and offer quotes will be in the warrant for various levels in the underlying price. Currently, Macquarie is the only issuer in Singapore who offers this service.

The live matrix is a very useful tool as it allows investors to see how the warrant price will move in line with the underlying price movement and whether Macquarie is maintaining a tight spread in our bid and offer quotes.

The “Live index futures” section on the home page of Macquarie’s warrant site is one of the few financial websites providing free live pricing on the index futures that our index warrants follow. There are also intraday and historical charts on these futures indices on our site.

Investors can trade the warrants listed on the SGX in the same way that they trade shares via a Singapore broker. They can buy and sell the warrants anytime up until the last trading day of the warrant, which is 5 trading days before its expiry date.

All structured warrants in Singapore are currently cash settled. Investors do not take delivery of the underlying asset. Instead, holders of warrants with positive value at expiry will receive the settlement amount in their CDP accounts within 5 business days after expiry, net of CDP handling fees of $21.80 (charged by CDP). Issuers will automatically exercise the warrant if it has any remaining value at expiry.

The settlement price of the warrants is determined by the settlement levels of their underlyings.

• For stock warrants, it is the average closing price of the underlying shares for each of the 5 trading days prior to the expiry date
  
  
• For index warrants, it is the final settlement price of the index futures on the expiry date. If the underlying is a foreign index, the settlement amount will be converted back to SGD using a FX rate taken on the expiry day of the warrant.

For the exact settlement formulas, please see https://www.warrants.com.sg/WarrantsGuidebook/cashsettlementamountforsinglesharewarrantsatexpiry for call warrants and https://www.warrants.com.sg/WarrantsGuidebook/formulatocalculatevalueofputwarrantatexpiry for put warrants.

If the warrant expires with zero value, investors need not do anything.

Trading warrants is not a ‘zero sum game’. The aim of issuers is to capture profit by managing risks in the warrants sold. Upon selling warrants, issuers will normally buy or sell shares or other assets to ‘hedge' their position and attempt to capture a ‘margin’ whether warrant prices go up or down.

For example, when an issuer sells a call warrant they will usually buy the underlying shares to hedge themselves. Thus, if the share price increases and investors profit on their call warrants, issuers will also gain on their shareholding.

Macquarie has been an issuer in the Singapore market for more than 10 years and is committed to developing and growing the Singapore warrants market.

For detailed explanations on various warrant topics, you can click into our Warrant Education section. We also have free education seminars conducted by our market makers.

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No, warrant holders do not receive ordinary dividends declared by the underlying company. However, this does not mean warrant holders are disadvantaged as expected ordinary dividends with ex date expected to occur between the warrant launch date and the warrant expiry date have already been included in the pricing of the warrant at the time when the warrant is launched (using a forecast which takes into account historical dividend payments, company announcements and market expectations).

Typically, companies will see their share prices fall by the dividend amount on the ex-dividend date . Since warrants track the movement in underlying shares, some may assume that the fall in share price would mean the price of the call warrants over the underlying should also fall whilst the price of put warrants would increase.

In this case, assuming all other factors being equal, there would be no change to the price of the call or put warrants if the price of the underlying shares falls by the dividend amount on the ex-dividend date. This is because the dividends had already been priced into the warrant upfront.

Corporate actions other than ordinary dividends such as special dividends, share splits and rights issues etc, are not priced into the warrant at warrant launch and are adjusted for by making changes to the warrant terms on the ex-date. For example, on the ex-date for a special dividend, the exercise prices and the number of warrants per share will be lowered, so that the impact of the corporate action is passed on to the warrant holders and call warrant holders are not disadvantaged by the corporate action.

The new, lower exercise price and number of warrants per share are adjusted/multiplied by an adjustment formula.

Assuming the corporate action only relates to dividend, the adjustment formula/factor for special dividends is as follows,

Adjustment Factor =
 (P – SD – FD) 
    (P – FD)       , where

P: Cum-dividend closing price of the underlying share on the last trading date before ex-dividend
SD: Special dividend per share
FD: Ordinary dividend per share that goes ex on the same day as the special dividend
Adjusted Exercise Price = Old Exercise Price x Adjustment Factor
Adjusted Number of Warrants Per Share = Old Number of Warrants Per Share x Adjustment Factor