A Beginner’s Guide: Call Warrants Basics

Call Warrants

A call warrant is a leveraged financial instrument which derives its value from the value of an underlying security. A call warrant can provide exposure to the underlying security for a fraction of the underlying securities price.

For a physical-settled call warrant, the warrant holder has the right, but not the obligation to buy the underlying security from the issuer at a predetermined price or Exercise Price at expiry or at anytime during the tenure of the call warrant.

For a cash-settled call warrant, the warrant holder can exercise at expiry or anytime within the tenure of the warrant to receive a cash payment based on the positive difference between the underlying security price and Exercise Price of the call warrant, adjusted by the Exercise Ratio and any other incidental charges.


Exercise Styles

American - Gives the warrant holder the right to exercise at anytime before or on Expiry Date
European - Gives the warrant holder the right to exercise only on Expiry Date


Expiry Date

The date on which the ability to exercise the call warrants expires.


Cash Settlement Amount

If the call warrants is In-the-Money, the Cash Settlement Amount upon exercise or expiry of a cash-settled call warrants shall be:

Cash Settlement Amount = Number of Call Warrant x (Closing Price - Exercise Price) x (1/Exercise Ration) x Settlement Exchange Rate


Closing Price

Closing Price may be determined as follows:

If a call warrant is exercised before the Expiry Date, the Closing Price shall be the closing market price of the underlying security on the market day immediately before the exercise date;
If a call warrant is exercised on the Expiry Date, the Closing Price will be the 5-day VWAMP of the underlying security before and including the market day before the Expiry Date;
As specified in the term sheet.


Exercise Price

In the case of physically-settled call warrants, the Exercise Price is the price at which the warrant holder is entitled to purchase the underlying security.

As for cash-settled call warrants, the Exercise Price is the price that is subtracted from the Closing Price of the underlying security in arriving at the Cash Settlement Amount.


Settlement Exchange Rate

The ratio of settlement currency for one unit of Reference Currency, being the currency of the underlying security


Exercise Ratio

Number of warrants in exchange for one (1) underlying security


Premium

Premium measures the percentage over the underlying security price required to break-even upon exercise or on expiry of the warrants:


Premium = [(Call Warrant Price x Exercise Ratio) + Exercise Price - Underlying Security Price] / Underlying Security Price


Gearing Ratio

Gearing ratio measures the exposure of warrants to the underlying security:


Gearing = Underlying Security Price / (Call Warrant Price x Exercise Ratio)


Delta

Delta is the relationship between the expected change in the call warrant price and the corresponding change in the underlying security price as follows:


Delta = (Change in Call Warrant Price x Exercise Ratio)/Change in Underlying Security Price


Effective Gearing

Effective Gearing is a measure of the actual leverage, which is computed as the theoretical % change in the call warrant price for a 1% change in the underlying security price:


Effective Gearing = Gearing Ratio x Delta


Moneyness


At-the-money or ATM - When Underlying Security Price = Exercise Price
In-the-money or ITM - When Underlying Security Price > Exercise Price
Out-of-money or OTM - When Underlying Security Price < Exercise Price


Intrinsic Value

Intrinsic Value = Underlying Security Price - Exercise Price


Liquidity Provider

Issuer will be the liquidity provider for the call warrants it issued. The process of market making involves maintaining bid and offer prices on the trading system of Bursa Securities on each Market Day, over the life of the call warrants.


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