Terminology of Warrent

A

American Style A warrant that may be exercised on any market day up to and including the expiry date.

At-the-Money (ATM) Call Warrant: Underlying Price = Exercise Price

B

Black-Scholes Model Most commonly used option pricing model.    Examples of other common option pricing models are Binomial and Trinomial.

Board Lot The minimum number of warrants that can be traded on Bursa Malaysia.

Break-even level Refers to the price at which a transaction produces neither a gain nor a loss.

C

Call Warrants A call warrant offers its holder the right, but not obligation to purchase certain amount of the underlying asset on a pre-determined exercise price within a pre-determined time.

Cash Settlement Amount Cash settlement amount is the positive amount received from the exercise or automatic exercise of the warrant at expiry. CALL WARRANTS Cash  Settlement Amount = Exercise Amount x 1    x (Closing Price - Exercise Price) - Exercise Expenses Entitlement

D

Delta Measures the theoretical movement in warrant price when the price of the underlying asset changes. Delta for Call Warrant lies between 0 and 1. Formula: Delta = Change in warrant price x Exercise ratio Change in the underlying price Example, a call warrant with an exercise ratio of 1, A delta of 0.50 implies that if the value of the underlying changes by 20 sen, then the value of the call warrant should change by 10 sen.

E

Effective Gearing Effective gearing reflects the relationship between changes in the warrant price and in the underlying price. Formula: Effective Gearing   = Gearing x Delta Effective gearing of 10 times, other things being equal, means for every 1% change in underlying price, the warrant price moves by 10%.

European Style A warrant that may only be exercised on the predetermined expiry date.

Exercise (Conversion) Ratio The number of warrants related to one unit of the underlying that the warrant holder is entitled to buy. For example, an ABC call warrant with a ratio of 5 warrants : 1 ABC share would indicate that 5 warrants are needed to exercise the right to buy one ABC share at the exercise price. For warrants linked to the price of shares, the ratio may be adjusted to reflect corporate actions, such as bonus issues, stock splits, rights issues, share consolidations or special dividends.

Exercise Price (Strike Price) For call warrants whose underlying is a share, the exercise price describes the pre-determined price at which the underlying share may be purchased. For warrants whose underlying is an index, the exercise level or strike level describes the pre-determined level of the index at which the warrant may be exercised. The exercise price or exercise level is used to calculate the cash settlement amount of a cash-settled warrant.

Expiry Also known as Maturity. The end of the life of a warrant as determined in the terms and conditions.

G

Gamma Measures the changes of a warrant’s delta as the price of the underlying asset changes, all other factors remain constant.

Gearing The additional exposure gained on the underlying by purchasing warrants. Formula: Gearing = Underlying price Warrant price  x  Exercise ratio Example, gearing of a warrant is 10x, it means using the same amount of capital, you will have 10 times more exposure than if you purchased the underlying. To estimate the increase / decrease in the warrant price relative to the underlying price, we should look at effective gearing.

H

Historical Volatility Used as a reference to assess the previous price fluctuations of the underlying asset. Normally expressed in number of days, eg. 10-day volatility, 90-day volatility, etc.

I

Implied Volatility The most important indicator when assessing a warrant. It refers to the estimate of future price volatility of a specified underlying asset and is used by the market as an indicator to decide whether a warrant is cheap or expensive. All things being equal, the higher the expected volatility, the higher the warrant price.

In-the-Money (ITM) Call Warrant : Underlying Price > Exercise Price For example, XYZ share trading at RM2.00, the RM1.50 call warrant would be ITM.

Intrinsic Value The amount by which a warrant is ITM. A warrant that is OTM has no intrinsic value.

Issuer The entity that issues the warrants, usually a financial institution, for example Kenanga Investment Bank.

L

Last trading day 2 market days immediately before the expiry date of the warrant.

Listing day The day the warrant is listed and quoted on the exchange.

M

Market Maker (Liquidity Provider) A Market Maker can be the issuer itself (eg. Kenanga Investment Bank) or an appointed designated Market Maker. A Market Maker provides liquidity by providing bid and offer prices on the trading system of Bursa Securities on each market day over the life of the structured warrants. 2 types of Market Makers: a) by obligation, b) voluntary. A Market Maker by obligation provides liquidity to the warrants by quoting both the bid and ask on the following basis: a) The minimum presence on each trading day in the Structured Warrants : 70% of trading hours b) The maximum spread of two-sided market quotes : 25 bids c) The minimum quantity on each of the two-sided market making quotes : 10 board lots (1,000 units of Structured Warrants)

Moneyness Relationship between exercise price and price of underlying asset. There are three forms of moneyness, which are In-the-Money (ITM), At-the-Money (ATM) and Out-of-the-Money (OTM). See also In-the-Money, At-the-Money and Out-of-the-Money.

O

Out-of-the-Money (OTM) Call Warrant : Underlying Price < Exercise Price For example, XYZ share trading at RM2.00, the RM2.50 call warrant would be OTM.

P

Premium Price difference between buying and exercising the warrant, compared to a direct purchase of the underlying asset. Formula: Premium for Call warrant = [(Warrant price x Exercise ratio) + Exercise price] - Underlying price Underlying price

R

Rho Measures the sensitivity of the price of a warrant to a 1% change in interest rates, all other factors remaining constant. Rho is a positive number for call warrants.

T

Theta Measures the expected daily decline in the value of a warrant due to time decay, all other factors remain constant. Theta is always negative as time decay is always working against a warrant holder.

Time Value The difference between the warrant price and intrinsic value.

U

Underlying Asset The financial instrument referenced by the warrant. Example, ABC-CI underlying asset is ABC shares.

V

Vega Measures the sensitivity of the warrant value for a 1% change in volatility.

Volatility The uncertainty in the movement of prices which will affect the return of an underlying. See also Historical Volatility and Implied Volatility.