Username
Password
Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,129.59 +5.14 +0.16%
Hang Seng 26,521.85 0.00 0.00%
Dow Jones 26,787.36 -29.23 -0.11%
Shanghai Composite 3,007.88 +34.23 +1.15%
Warrants Basics – Why Trade Warrants?
Education | 07 June 2011
By: jason.liew
Articles (66) Profile

By Macquarie Capital Securities (Singapore) Pte. Limited

Changes to the Singapore Exchange (“SGX”) listing rules that were made in late 2003 now require warrant issuers to appoint a Designated Market Maker (“DMM”) to provide liquidity in warrants. The appointment of a liquidity provider means it is easier for you to buy and sell warrants at any time. Macquarie’s expertise is in providing you liquid markets.

Some of the advantages of warrants include:

Gearing
Warrants cost only a fraction of the price of shares. However, they can provide investors with greater exposure to share price movements as their prices generally rise and fall more steeply than shares in percentage terms. This increased exposure can subsequently offer greater potential profit as a percentage of the capital invested.

Gearing is a double edged sword, meaning warrants also expose investors to greater potential loss in percentage terms. However, you are never obliged to pay anything more than the initial price of the warrant, so the maximum amount you can lose is limited to the price paid. This is one of the advantages of warrants over margin based gearing.

Our hypothetical example in the pricing variables page illustrates the relative price movements of a call warrant and a put warrant against corresponding movements in the underlying share price.

No margin calls
Even if the underlying share or index moves adversely, warrant investors cannot be asked by the issuer to make margin calls.

Highly liquid
Due to the existence of designated market makers, warrants will generally provide high volumes on the bid and offer for investors to easily enter and exit their trade. This volume can often be in excess of that provided in the underlying stock.

Tight spreads
Warrants will normally trade on very tight spreads, as market makers strive to provide tight and liquid markets to make their warrants more attractive to investors. The spread of a warrant is generally a function of the spread in the underlying share, the warrants delta and the length of time to expiry.

Low transaction costs
Generally brokerage and associated transaction costs are reduced when trading warrants because the price of Warrants is usually less than the underlying share price.

Ease of trade
Warrants are traded on the SGX allowing investors to buy and sell warrants just like shares.

Portfolio Protection
Warrants can be used as a form of insurance to protect an existing share portfolio against a falling market. An investor with a holding in a particular stock who was nervous about the future direction the market could purchase put warrants instead of selling shares. This would allow the investor to retain share ownership without realizing capital gains and without having full exposure to the downside risks. Investors should, however, understand the complexity of utilising Warrants for hedging or portfolio protection purposes. For example, the value of the Warrants may not exactly correlate with the value of the underlying share.

Hedging
Call Warrants can be used to hedge against future price increases. An investor interested in purchasing shares who did not have immediate access to funds could purchase call warrants to capture the benefits of an anticipated price rise. This would allow the investor to establish a price (the exercise price) from which they have exposure to the shares in the future.

Releasing share capital
Call Warrants can also be used to free up capital invested in shares. An investor may sell existing share holdings and purchase a corresponding number of Call Warrants for a fraction of the price. The investor has maintained exposure to share prices while releasing capital from the security holding.

Warrant Basics
1. What Are Warrants?
2. Why Trade Warrants?
3. Selecting A Warrant
4. Pricing Variables

Disclaimer


The content of this article is reproduced with permission from Macquarie Capital Securities (Singapore) Pte. Limited (Registration No 198702912C) (“MCSSPL”), holder of a capital markets services licence under the Securities and Futures Act, Chapter 289 of Singapore. No part of this article may be copied, either in whole or in part, or distributed to any other person without permission from MCSSPL.

This article is not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject SharesInv.com, MCSSPL or their respective affiliates to any registration or licensing requirement.

The information contained in this article is obtained from sources believed to be reliable and accurate as at the date of publication. Opinions, estimates and other information contained herein may be changed or withdrawn without notice. Any prices and quotes published in this article are purely indicative and for information purposes only. Indicative prices and quotes shown in this article may vary significantly from indicative prices or quotes available from other sources.

The information contained in this article is for general information only and while SharesInv.com and MCSSPL have taken reasonable care to ensure the accuracy and completeness of the information provided, it will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information.

Investment products are subject to significant investment risks, including the possible loss of the principal amount invested. Past performance of investment products is not indicative of their future performance.

This Newsletter is for general circulation only and is not an offer or solicitation to buy or sell, nor financial advice or recommendation for any investment product. It does not address the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a financial adviser regarding the suitability of any investment product before investing or adopting any investment strategies.

Prior to buying or selling a warrant, investors should receive appropriate training on warrants characteristics from their broker, from the Singapore Exchange or from one of the issuers. SharesInv.com is not a broker-dealer. SharesInv.com is not affiliated with MCSSPL or their affiliates and does not pay or receive any fee for the reproduction of this article. Investors should exercise judgment and perform adequate due-diligence prior to making any investment.

Macquarie Bank Limited (ABN 46 008 583 542) (“MBL”) is the Issuer of the Macquarie warrants in Singapore and appoints MCSSPL as the designated market maker of the warrants. MBL is regulated as an authorised deposit taking institution by the Australian Prudential Regulation Authority. MBL, acting through its Singapore branch is authorised and licensed by the Monetary Authority of Singapore to carry on wholesale banking business in Singapore pursuant to the Banking Act, Chapter 19 of Singapore and therefore is subject to the supervision of the Monetary Authority of Singapore. MCSSPL is not an authorised deposit taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia), and MCSSPL’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of MCSSPL.

MBL, MCSSPL and their affiliates may be involved in financial, investment and professional activities which may on occasion give rise to interests or a conflict of interests in respect of the investment products. MBL, MCSSPL and their affiliates make no representation nor can it give any assurance as to the liquidity in the trading of warrants as the designated market maker may be the only person quoting prices in the warrants.

You should visit www.warrants.com.sg for more information on warrants and detailed disclaimers/risk disclosures of MCSSPL.


Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.