## Friday, 7 December 2012

### Warrants Basics

A
At-the-money (ATM)
A warrant whose strike is near or equal to the underlying security's price.

B
Break-even point
That implies the price level at which the investor will break-even on warrant expiry; for instant, the investor will make profit if the closing price is higher than strike price.

The minimum number of warrants that can be traded on the Singapore Stock Exchange.

C
Call
A call warrant provides the holder with a right, but not an obligation, to buy a stock/index at a pre-determined strike price on maturity date. However, currently most of the warrants are cash settled.

Conversion ratio
It indicates the number of warrants related to one share of the underlying that the holder is entitled to buy or sell.

D
Delta
Delta measures "how much the warrant price will move for a one dollar move in the underlying security". The delta of a call warrant has an upper bound of 1.00 (decimal format) or 100% (percent format) and a lower bound of zero. A call warrant with a delta of 1.00 will move up or down one full point for each full point move up or down in the price of the underlying security. A call warrant with a delta of zero should move negligibly, even if the underlying security makes a relatively large move. Warrants that are at-the-money have a delta of approximately 0.50.

For put warrants, the delta lies between -1.00 (or -100%) and zero. A rise in the underlying security will bring about a drop in the price of a put warrant.

E
Effective Gearing
A warrant's effective gearing is the relative percent change in a warrant's value for a given percent change in the price of the underlying security. A warrant's effective gearing is not constant and is higher for warrants which are out-of-the-money and/or close to expiry.

Expressed mathematically:
Effective gearing = gearing x delta
G
Gamma*
It is the rate of change of the portfolio's delta with respect to the price of the underlying asset.

Gearing
The ratio of the share price to the warrant price (multiplied by the conversion ratio, if applicable).
 Gearing = ___________share price__________ warrant price x conversion ratio
H
Hedging
A trade designed to reduce risk, for instance, a put warrant may act as hedge for a current holding in the underlying asset.

I
Implied Volatility
Implied volatility is the volatility anticipated by the financial markets. The higher the implied volatility, the higher the value of the warrant.

Implied volatility is also the volatility implicit in the market price of the warrant. For warrants of similar terms, the higher the implied volatility, the more expensive a warrant is.

In-the-money (ITM)
A warrant with the strike below (for a call warrant) or above (for a put warrant) the price of the underlying security.

Intrinsic Value
For a call warrant, the amount that equals to the market value of the underlying security less the strike. For a put warrant, the amount that equals to the strike less the market value of the underlying security. The intrinsic value corresponds to the amount by which a warrant is in-the-money.

L
The last trading day of a structured warrant is the fifth trading day prior to the maturity date. After the last trading day, investors will not be able to buy or sell the structured warrant in the market.

M
Maturity Date
It is the expiry date of a warrant.

O
Out-of-the-money (OTM)
A warrant with the strike above (for a call warrant) or below (for a put warrant) the price of the underlying security.

P
The percentage by which the underlying share price needs to have moved at maturity for the investor to break even.
Premium for a call warrant (%)

 = [strike + (warrant price x conversion ratio)] - share price x 100% share price

Premium for a put warrant (%)
 = share price - [(strike - (warrant price x conversion ratio)] x 100% share price

Put
A put warrant provides the holder with a right, but not an obligation, to sell a stock/index at a pre-determined strike price on maturity date. However, currently most of the warrants are cash settled.

S
Strike Price
It is the price at which the warrant-holder to buy (a call) or to sell (a put) the underlying asset. However, currently most of the warrants are cash settled.

T
Theta*
It is the rate of change of the value of the portfolio with respect to the passage of time with all else remaining the same. Theta is sometimes referred to as the time decay of the portfolio.

Time Value
The portion of a warrant's price that is not accounted for by the intrinsic value.

U
Underlying Asset
The listed company or stock index that the warrant is issued on.

V
Vega*It is the rate of change of the value of the portfolio with respect to the volatility of the underlying asset.

Volatility*
A measure of the uncertainty of the return realized on an asset.

*Source: Options, Futures, and other derivatives (Fifth edition), John C. Hull

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