Company Warrant
A Company warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date.
A Company warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date.
Concept of Company warrant
A company warrant is a derivative issued by the Mother company, like KFC-WB is issued by the mother company KFC to let investor to buy the mother stock at a later date before expiry.
Company warrant is often issued during stock split, dividend distribution, or bonus entitlement.
Conversion ratio is the number of warrants needed in order to buy (or sell) one mother share. Usually the conversion ratio is set 1:1 by mother company on KLSE.
Warrant Premium 憑單轉換溢價（%）is a useful indicator to decide on company warrant.
Warrant Premium (%) = {(Warrant Price + Conversion Price) - Mother Share Price} / Mother Share Price
轉換溢價＝｛（憑單市價+轉換價）－母股市價｝÷母股市價
Warrant Premium (%) = {(Warrant Price + Conversion Price) - Mother Share Price} / Mother Share Price
轉換溢價＝｛（憑單市價+轉換價）－母股市價｝÷母股市價
Warrant premium is a measure of how much an investor is paying more to purchase the company warrant as compared to same unit amount of mother share at the current/latest price.
Structured Warrant
Definition from KLSE; “Structured warrants are proprietary instruments issued by a third-party issuer, namely an eligible broker or financial institution that give holders the right, but not the obligation, to buy or sell the underlying instrument in the future for a fixed price. Essentially, you are making a ‘reservation’ to buy or sell a pre-determined number of the underlying instrument at a certain price in the future when you invest in a structured warrant.”
In other words, Call warrant is a type of structured warrant. As opposed to company warrant, structured warrants, i.e. Call and Put warrant are issued by a THIRD PARTY financial institute. In America, structured warrant is called option trading, where it has Call and Put option. In Malaysia, Put warrant is not yet popular for many reasons.
Concept of Call Warrant
Call warrant is a future play that often last for few months to 1 year for holders to earn money by matching the price difference of the underlying shares and the exercise price, with dividing the exercise ratio, by expecting an uptrend of underlying shares.
For example buying Apple Call warrants in KLSE (Stock code APPLE-C2, C3 & C4) by matching the Apple stock (Stock code APPL) listed on Nasdaq to gain a price difference with dividing the ratio in order to sell the Call warrant at higher price at a later date.
For example buying Apple Call warrants in KLSE (Stock code APPLE-C2, C3 & C4) by matching the Apple stock (Stock code APPL) listed on Nasdaq to gain a price difference with dividing the ratio in order to sell the Call warrant at higher price at a later date.
In the event of expiry, third party issuers offer cash settlement based on the following formula;
Cash Settlement= No. of Call Warrants x [Closing Price -Exercise Price]/ Exercise Ratio
Jolly's Call Warrant formula: Say Conversion ratio is 8
A common misconception;
Exercise price + Call warrants + Premium = Mother ex-price, is the Breakeven of Call warrant.
Answer is false.
Exercise price + Company warrant + Premium = Mother ex-price, is the Breakeven of Company Warrant.
Answer is true
Jolly's Call Warrant formula: Say Conversion ratio is 8
If Mother ex-Price = 8 warrants + Exercise Price, I will get zero money back. This is called intrinsic value = zero.
If Mother ex-Price = 2 x 8 warrants + Exercise Price, I will get 100% of my money back. This is called Breakeven.
If Mother ex-Price > 2 x 8 warrants + Exercise Price, I will make money. This is called 'In the money'
However if premium exists on Call warrants or Mother ex-Price < 8 warrants + Exercise Price
my loss will be capped at 8 warrants, my initial investment. Buying Call warrant is just like buying Insurance - for people who afraid deal with massive loss.
If Mother ex-Price = 2 x 8 warrants + Exercise Price, I will get 100% of my money back. This is called Breakeven.
If Mother ex-Price > 2 x 8 warrants + Exercise Price, I will make money. This is called 'In the money'
However if premium exists on Call warrants or Mother ex-Price < 8 warrants + Exercise Price
my loss will be capped at 8 warrants, my initial investment. Buying Call warrant is just like buying Insurance - for people who afraid deal with massive loss.
A common misconception;
Exercise price + Call warrants + Premium = Mother ex-price, is the Breakeven of Call warrant.
Answer is false.
Exercise price + Company warrant + Premium = Mother ex-price, is the Breakeven of Company Warrant.
Answer is true
How To Tell Company Warrant from Call Warrant?
1. Company warrant got a prefix of letter W, whereas Call warrant got a prefix of letter C. IJM-CA, CB.... CZ. As mentioned earlier, Company warrant and Call warrant have different issuers. Mother company issues company warrant, which is also the underlying share of company warrant. The financial/money institutes, like investment bank or broker firm issues Call warrant.
2. Company warrant is issued with few years of exercise period for the buyer to buy the underlying asset with a fixed price before expiry date, whereas structured warrant is normally issued with 6 to 12 months lifetime, and only exercised by the third party issuer upon expiry.
3. Call Warrant is often considered high risk because it is difficult to get buyers with big volume at any time and any price, although the cost of buying a unit of share is very cheap. Trading Company warrant is relatively easier.
4. Company warrant is guaranteed by the Mother company for any kind of redemptions that it announces, i.e. Cash, conversion to mother shares, or bonus after a certain years. However Call warrant is not guaranteed by the issuer for any kind of redemptions announced by the underlying stock. Cash settlement is only available on expiry with underlying stock price ends higher than exercise price.
5. Like structure warrant, company warrant holders are not entitled to dividend distributed by mother or underlying share.
5. Like structure warrant, company warrant holders are not entitled to dividend distributed by mother or underlying share.
For more information on Call Warrant,
Gearing Ratio for Call Warrant
Gearing is a ratio depends where you use it. The most common one refers to an equity (an entity of ownership), i.e. the Net Gearing ratio is the owners' equity or capital divided by amount of debt.
There are other forms of gearing ratios are used to assess or measure the degree of company exposed to a downfall. Debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets).
For a structured warrant such as Call warrant, gearing ratio is the extent of leverage. In other words, the degree to which an investor is using of Call warrant as the financial instrument to increase the potential return of an investment. Leverage simply means the use of financial instrument for investment. Another investment term for leverage is, the amount of debt used for asset financing. Highly leverage means highly financed by loan or mortgage.
There are other forms of gearing ratios are used to assess or measure the degree of company exposed to a downfall. Debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets).
For a structured warrant such as Call warrant, gearing ratio is the extent of leverage. In other words, the degree to which an investor is using of Call warrant as the financial instrument to increase the potential return of an investment. Leverage simply means the use of financial instrument for investment. Another investment term for leverage is, the amount of debt used for asset financing. Highly leverage means highly financed by loan or mortgage.
The gearing factor/ratio is calculated by dividing the original share price by the original warrant price: $1.50 / $0.50 = 3. The "3" is the gearing factor - essentially the amount of financial leverage the warrant offers. The higher the number, the larger the potential for capital gains (or losses).
