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Hock Lock SiewPublished October 20, 2011

Structured warrants back in vogue, worth acloser look

By R SIVANITHY

STRUCTURED warrants (SWs) have been in the trading limelight for thepast couple of months. Yesterday, for example, saw no less than five of them in the top 20 most active list, suggesting such instruments are

making a comeback after about two years in the doldrums - not a surprisegiven that SWs are popular when volatility is high and markets are

range-bound as they are now. It might therefore be worthwhile forpunters to review some warrant basics.

For better organised information, it is better to visit the respective issuers'websites for details of prospective SWs. Since Macquarie's SWs dominate

the present warrant landscape - all six in the top 20 active list yesterdaywere issued by Macquarie - we'll stick to its SWs for illustration.

Basically, SWs offer short-term traders a leveraged play on an underlying

asset such as an index or a stock. When that asset moves in the desireddirection, the warrant holder should enjoy the leverage benefits, meaningmagnified profits.

Two types of SWs are available. Calls give the right to buy the underlyingasset at a fixed exercise price and rise when the underlying rises. Puts

give the right to sell the underlying asset at a fixed exercise price and risewhen the underlying falls.

In the case of yesterday's most actively traded counter, which, using SGX'scumbersome nomenclature, is labelled 'HSI18400MBeCW111129' the

underlying asset is the Hang Seng Index (HSI). MBeCW denotes that it is aMacquarie Bank equity call warrant and the numbers 111129 denote the

expiry date, which is 29 Nov 2011. The relevant URL ishttp://www.warrants.com.sg/en/warrants/indicator_e.cgi?code=O5MW.

First, note the figure 18,400, which denotes the exercise price and

represents the HSI level around which the punter is betting. Since the callgives the holder the right to buy at 18,400, the warrant is said to be

'in-the-money' if the HSI rises above 18,400. The HSI yesterday closed at18,309, meaning the warrant was 91 points or about 0.5 per cent 'out-of-

the-money' (OTM). This is shown in the Macquarie website under theheading 'Moneyness'.

Second, note that the exercise price of 18,400 is in HK dollars while the

warrant is traded in Sing dollars so currency conversion is needed. Sinceone thousand warrants are needed to convert into one HSI, this means atyesterday's closing price of 16.5 cents per warrant, a holder who wishes tobuy one HSI will need $165 or about HK$1,017.

Although no payment or conversion is actually done, in theory if a holderwas to fork out the HK$1,017 and the HK$18,400 to buy one HSI, hewould be paying a total of HK$19,417 to buy something worth HK$18,309.

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tured warrants back in vogue, worth a closer look - October 20, 2011 http://www.businesstimes.com.sg/sub/companies/story/0,4574,46

20/10/2011

8/3/2019 Structured Warrants Back in Vogue, Worth a Closer Look - October 20, 2011

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The premium is therefore HK$1,108 or just over six per cent and this isgiven in Macquarie's website under 'Premium'.

Third, note the leverage or gearing benefit. Anyone holding $165 orHK$1,017 worth of warrants can benefit from rises in an asset valued at

HK$18,309, so the simple gearing is 18309/1017 or 18 times. However, itis more accurate to moderate this figure by the warrant's delta, which

measures movements in the warrant's price to a one dollar move in theunderlying's price. In this case, Macquarie has calculated this warrant'sdelta as 0.5, so the correct gearing of this instrument is 18x0.5 or about 9times which is shown in the website under 'effective gearing'.

This means that on average, a one per cent rise in the HSI will translate toa nine per cent rise in this warrant. This, perhaps more than anything else,accounts for the recent upsurge in warrant trading, especially since the

HSI can swing up to five per cent every day.

The above is, of course, a highly simplified treatment of a relativelycomplex and risky instrument. Punters should familiarise themselves withother important parameters like volatility and time to maturity before

taking the plunge. But given the current spike in volatility, it could well beworthwhile to do so.

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tured warrants back in vogue, worth a closer look - October 20, 2011 http://www.businesstimes.com.sg/sub/companies/story/0,4574,46

20/10/2011