Basic & Defination For Beginners - Warrants

Hi, my dear readers :

Here are some of the “keywords” commonly used in warrants.

(1) WARRANTS :: are securities issued by a company. They give holders the right to purchase shares in the company at a specific price at a specific date in future. Warrants are tradable and the value will go up and down as the price of the shares to which they relate (the underlying share or mother share) goes up and down. Warrants have no right to dividends and no voting rights.

(2) OUT OF THE MONEY :: If the underlying share price is below the exercise price, the warrants are “out of the money” and are deem worthless.

(3) IN THE MONEY :: If the underlying share price rises above the exercise price, the warrants are “in the money” and worth something.

(4) PREMIUM :: measures the amount (in %) an investor is willing to pay for a warrant in excess of the market value of the underlying securities to enjoy the returns by buying the warrant.

Premium = <(Warrant Price + Exercise Price) – Underlying Share Price> / Underlying Share Price

(5) GEARING :: measures the ratio (or units) of warrants one can purchase with an investment in the underlying security or mother share. It is a ratio of mother share price over warrant price.

Gearing = Underlying Share Price / Warrant Price

(6) EXPIRY DATE :: After this date, the warrant holder loses the rights to purchase or sell the underlying security.

(7) EXERCISE PRICE :: The predetermined price that the warrant holder is entitled to purchase or sell the underlying security.

(8) EXERCISE RATIO :: The number of warrants required to exercise into one share of the underlying security.

(9) HISTORICAL VOLATILITY :: is a figure derived from the price action of the underlying security using statistical calculation.

(10) IMPLIED VOLATILITY :: is a figure derived from warrants pricing formula when we input the current warrant price and work backwards to derive the (implied) volatility figure. It represents current market expectations of the future volatility of the underlying security.

(11) DELTA :: represents the magnitude of the warrants price movement in theory in response to movement in underlying share price.

Delta = Change In Warrant Price / Change In Underlying Share Price.

(12) EFFECTIVE GEARING :: is a more accurate measure of a warrant's gearing. It adjusts for the Delta of the warrant.

(13) CALL WARRANT :: Holders of the call warrants have the right, but not obligation, to buy the underlying share (or security) from the issuer for a particular price at a future date based on terms of issue or to receive cash settlement based on the underlying share price and exercise price of the call warrant.