A Structured Warrant is a leveraged financial instrument which derives its value from the value of an underlying security. A Structured Warrant can provide exposure to the underlying security for a fraction of the underlying securities price. Structured Warrants are listed and traded on stock exchanges.
Note: The right has a limited lifespan and it ends when the warrant reaches its Expiry Date. The premium/price for the warrant is actually the cost for having the right to buy/sell the asset as explained below.
Structured Warrants are usually issued by a bank / securities firm which allows the holder to have the right to buy/sell a given quantity of underlying asset at the strike/exercise price on or before the Expiry Date from the issuer.
What are the main differences between Company warrants and Structured Warrants?
|Company Warrants||Structured Warrants|
|Issuer||Own company||3rd party issuer, usually a bank|
|Underlying||Own company shares||Any underlying asset that meets legal/regulatory requirements|
|Expiry Period||Usually 3 - 5 years||Usually 6 months - 2 years|
|Liquidity||No market maker||Designated market maker|
|Settlement method||Physical delivery of shares||Usually cash settled|
|Factor||Change of Factor||Impact on Warrant Price|
|Dividend Expectations||Increase more than expected||Negative|
The main reason for trading Structured Warrants is gearing. Structured Warrants need small capital outlay but offer a higher percentage return (positive and negative) when compared with the underlying asset. However, be mindful that it is not uncommon for Structured Warrants to expire out of the money.
Benefit 1: Unlimited upside and limited downside
Benefit 2: Highly Liquid and Tight Spread
Benefit 3: Lower Transaction Costs
Risk 1: Gearing is a double edged sword
Risk 2: Market Risks
Risk 3: Limited Life Or “Time Decay”
Risk 4: Liquidity Risk
Risk 5: Credit Risk
Risk 6: Currency Risk
Structured Warrants Price = Intrinsic Value + Time Value
The intrinsic value of the Structured Warrant is the difference between the current underlying price and its exercise price.
When the underlying price is above the exercise price for a call warrant, the call warrant is In the Money (ITM) and has an intrinsic value.
In other words, only ITM Structured Warrants have an intrinsic value. For Out of the Money (OTM) Structured Warrants, it has no intrinsic value and only has time value.
Structured Warrants have a limited lifespan. Hence, if there is no movement in underlying asset and implied volatilities, Structured Warrants diminish in value every day. Structured Warrants with some time remaining until expiry is worth some value since there is a possibility that the Structured Warrants will be ITM. At issuance, the time value is at a maximum of 100%. At expiry, the time value falls to 0%. Time decay (the rate of decrease in time value of the Structured Warrants) accelerates when the Structured Warrants is near to its expiry.
How to Calculate Cash Settlement Amount?
Settlement Calculations Formulas
Please refer to the latest base prospectus
Where the underlying financial instrument are shares, the settlement price will be calculated using one of the following methods:
Where the underlying financial instrument is an index, the settlement price must be calculated using one of the following methods:
Please refer to the latest base prospectus
(Note: a, b & c need significant move in underlying shares in order to theoretically move the Structured Warrants price)
Current Term Sheets
INVESTORS ARE WARNED THAT THE PRICE OF THE STRUCTURED WARRANTS MAY FALL IN VALUE AS RAPIDLY AS IT MAY RISE AND HOLDERS OF THE STRUCTURED WARRANTS MAY SUSTAIN A TOTAL LOSS OF THEIR INVESTMENT. INVESTORS SHOULD THEREFORE MAKE SURE THEY UNDERSTAND THE TERMS AND CONDITIONS OF THE STRUCTURED WARRANTS OFFERED, THE RISK FACTORS INVOLVED AND WHERE NECESSARY, SEEK PROFESSIONAL ADVICE BEFORE INVESTING IN THE STRUCTURED WARRANT.
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