Education
- Basics of Structured Warrants
- Why Invest in Structured Warrants?
- How to Choose a Structured Warrant?
- Key Risk Factors of Investing in Structured Warrants
- Structured Warrants Terminology
What Are Structured Warrants?
<p>A structured warrant is a leveraged financial instrument, which derives its value from the value of an underlying instrument. A structured warrant can provide exposure to the underlying instrument for a fraction of the price of the underlying instrument.<br></p>
Types of Structured Warrants
<p><span>Structured warrants are issued by eligible third-party company, structured warrants are exchange-traded financial instruments over an underlying instrument. Call warrants, put warrants, bull equity-linked structures, callable bull/bear certificates or such other structures as may be specified in the listing requirements are collectively known as Structured Warrants.</span><br></p><p><strong>1. Types of Structured Warrants</strong></p><p>There are several types of structured warrants as follows:</p><p>(a) <strong>Call Warrant</strong></p><p>A call warrant gives a person an actual, contingent or prospective right to:</p><p>(i) receive a cash amount, depending on the fluctuation in the price of an underlying instrument, and the amount will be calculated in accordance with the terms of the warrant (this is also known as cash-settled call warrant); or</p><p>(ii) buy a specified number of units of the underlying instrument or exchange-traded fund at a specified price on or by a specified future date (this is known as a physically-settled call warrant).<br></p><p>(b) <strong>Put Warrant</strong></p><p>A put warrant gives a person an actual, contingent or prospective right to:</p><p>(i) receive a cash amount, depending on the fluctuations in the price of an underlying instrument, and the amount will be calculated in accordance with the terms of the warrant (this is known as cash-settled put warrant); or</p><p>(ii) sell a specified number of units of underlying instrument or exchange-traded fund at a specified price on or by a specified future date (this is known as physically-settled put warrant).</p><p><strong>2. Style of Call and Put Warrants</strong></p><p>In respect of call and put warrants, there are two warrant styles as follows:</p><p>(a) <strong>American Style</strong></p><p>An American style warrant allows the warrant holder the right to exercise the warrant any time before or on expiry date.</p><p>(b) <strong>European Style</strong></p><p>An European style warrant allows the warrant holder the right to exercise the warrant on the expiry date.<br></p><p><strong>3. Moneyness</strong></p><p>(a) Call Warrant</p><p><img src="/media/Education Topics/Call Warrant Moneyness.png" alt="Call Warrant Moneyness.png"><br></p><p>(b) Put Warrant</p><p><img src="/media/Education Topics/Put Warrants Moneyness.png" alt="Put Warrants Moneyness.png"><br></p>
Leverage Play
<p>The advantage of buying a structure warrant, as opposed to a direct investment in the underlying instrument, resides in the leverage effect the structured warrant offers. Structured warrants cost a fraction of the price of the underlying instrument, requiring only a smaller capital outlay for a similar exposure to the underlying instrument.</p>
Unlimited Upside and Limited Downside
<p>The unlimited upside and limited downside features of a structured warrant gives investors unlimited profit potential with losses always limited to the cost paid for the structured warrant.<br></p><p><img src="/media/Education Topics/Unlimted Upside Image.png" alt="Unlimted Upside Image.png"><br></p>
Advantages Compared to Share Margin Financing
<p>(a) No margin call</p><p>(b) No processing fees</p><p>(c) Limited downside</p><p>(d) No collateral required</p><p>(e) Higher gearing</p>
Low Transaction Cost
<p>Brokerage fees are significantly lower for a structured warrant as its price is a fraction of the price of the underlying instrument.<br></p>
Warrant Liquidity
<p>Structured warrants supported by a good liquidity provider or market maker will ensure that there is sufficient liquidity to enter and exit the market.</p><p>CIMB Bank Berhad is a registered market maker for all the structured warrants it issues. Please refer to our base prospectus for a description of our obligation as a registered market maker.</p>
Risk Assessments
<p>Investors should understand the dynamics of how the product works, the associated risks, and their risk tolerance before buying any structured warrants. <br></p>
Performance of the Underlying Instrument
<p>The performance of a structured warrant is tagged closely to the price performance of the underlying instrument. Before buying a structured warrant, investors should research the outlook of the underlying instrument.<br><br>Investors should buy a call warrant if they are bullish on the price performance of the underlying instrument. If investors are bearish on the price performance of the underlying instrument, then they should buy a put warrant.<br></p>
Characteristic of Structured Warrants
<p>Every structure warrant is unique. Before deciding to buy a structured warrant, investors should compare the features of various structured warrants of the same underlying instrument. The key features are implied volatility, time to maturity and moneyness.<br></p>
Warrant Liquidity
<p>Structured warrants supported by a good liquidity provider or market maker will ensure that there is sufficient liquidity for investors to enter and exit the market.<br></p>
Limited Lifespan
<p>Unlike ordinary shares, structured warrants have an expiry date. <br></p>
Gearing Effect
<p>Structured warrant is a leveraged product. In general, the percentage change in the price of a structured warrant is greater than that of its underlying instrument.<br></p>
Market Risk
<p>Market value of structured warrants is dependent on many prevailing market forces, including but not limited to the price movement of underlying instrument, volatility, change in interest rate and change in dividends of the underlying company.<br></p>
Credit Risk
<p>Investors undertake the credit risk of the issuer of structured warrants. The credit risk of an issuer lies in its ability to settle the cash settlement amount at expiry.<br></p>
Underlying Instruments
<p>Ordinary shares, index, a basket of ordinary shares, a basket of indices or exchange-traded funds<br></p>
Cash Settlement Amount
<p>The positive difference between the exercise price of a structured warrant and the price of its underlying instrument upon expiry of a cash-settled structured warrant<br><br>If the structured warrant is out-of-the-money, the cash settlement amount will be zero.<br></p>
Warrant Price
<p><span style="font-size: 1rem;">Warrant price has two components, namely intrinsic value and time value.</span><br></p><p>Warrant Price = Intrinsic Value + Time Value, where:</p><p>(a) Intrinsic value is the greater of zero and the difference between warrant price and the price of its underlying instrument; and</p><p>(b) Time value is the difference between warrant price and intrinsic value of a warrant.</p><p><img src="/media/Education Topics/Warrant Price Terminology 3.png" alt="Warrant Price Terminology 3.png"><br></p>
Exercise Ratio
<p>The number of structured warrants per underlying instrument.<br></p>
Settlement Exchange Rate
<p>The ratio of settlement currency for one unit of the currency in which the underling instrument is denominated.<br></p>
Gearing Ratio
<p>Measures the leveraged exposure of warrants to the underlying security.</p><p>Gearing Ratio of a structured warrants = [Underlying Instrument Price/Level] / [Warrant Price * Exercise Ratio]</p><p><br></p>
Premium
<p>Warrant premium measures the cost of purchasing (disposing) an underlying instrument through the structured warrant, compared to buying (selling) the underlying instrument directly. The formula to calculate warrant premium are as follows:</p><p>Premium % of a call warrant = [ (Call Warrant Price * Exercise Ratio) + Exercise Price/Level - Underlying Instrument Price/Level] / Underlying Instrument Price/Level * 100%</p><p> </p><p>Premium % of a put warrant = [ (Put Warrant Price * Exercise Ratio) + Underlying Instrument Price/Level - Exercise Price/Level] / Underlying Instrument Price/Level * 100%</p><p><br></p>
Liquidity Provider
<p>Structured warrants supported by a good liquidity provider or market maker will ensure that there is sufficient liquidity to enter and exit the market.<br><br>CIMB Bank Berhad is a registered market maker for all the warrants it issues. Please refer to our base prospectus for a description of our obligation as a registered market maker.<br></p>
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