| Call Warrants |
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| Contents |
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| A Beginner’s Guide: Call Warrants Basics |
Call Warrants
Exercise Styles
Expiry Date
Cash Settlement Amount
Closing Price
Exercise Price
Exercise Ratio
Premium
Gearing Ratio
Delta
Effective Gearing
Moneyness
Intrinsic Value
Liquidity Provider
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| Why Buy Call Warrants? |
Leverage Play
Unlimited Upside, Limited Downside
Better Alternative than
Share Margin Financing Liquidity
Low Transaction Cost
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| How to Choose a Call Warrrant? |
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| Behaviour of Call Warrants |
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| The Six Myths of Call Warrants |
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| Where to obtain Information on Call Warrants? |
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| A Beginner’s Guide: Call Warrants Basics |
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| 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.
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| 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
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| Expiry Date |
The date on which the ability to exercise the call warrants expires.
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| 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:
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| Cash Settlement Amount = Number of Call Warrant x (Closing Price - Exercise Price) x |
1 |
x Settlement Exchange Rate |
| Exercise Ratio |
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| 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.
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| 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.
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| Settlement Exchange Rate |
The ratio of settlement currency for one unit of Reference Currency, being the currency of the underlying security
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| Exercise Ratio |
Number of warrants in exchange for one (1) underlying security
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| Premium |
Premium measures the percentage over the underlying security price required to break-even upon exercise or on expiry of
the warrants:
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| Premium = | (Call Warrant Price x Exercise Ratio) + Exercise Price -
Underlying Security Price | | Underlying Security Price |
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Gearing Ratio |
Gearing ratio measures the exposure of warrants to the underlying security:
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| Gearing = | Underlying Security Price |
| Call Warrant Price x Exercise Ratio |
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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:
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| Delta = | Change in Call Warrant Price x Exercise Ratio |
| Change in Underlying Security Price |
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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:
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Effective Gearing = Gearing Ratio x Delta
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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
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| Intrinsic Value |
Intrinsic Value = Underlying Security Price - Exercise Price
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| Liquidity Provider |
CIMB 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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| Why Buy Call Warrants? |
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 | Leverage Play |
| Gearing ratio of 4 to 12 times |
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 | Unlimited Upside and Limited Downside |
| The maximum loss = Price of the call warrants paid by the warrant holder = A fraction of underlying security price |
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 | Better Alternative than Share Margin Financing |
- No margin call
- No processing fee, rollover fee, etc.
- Limited downside
- No collateral required
- Substantially higher leverage
| | Generally, share margin financing facility will require a security cover
between 1.5 times and 2.5 times of approved securities. |
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 | Liquidity |
| CIMB is the liquidity provider for all its call warrants issues. Subject to certain market condition, CIMB will provide a
two-way market for its call warrants issues during the tenure of the warrants. |
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 | Low Transaction Cost |
| Less brokerage as call warrant price is a fraction of the underlying security price. |
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| How to Choose a Call Warrant? |
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Risk Assessment |
In general, investors should understand the dynamics of how the product works, the associated risks, and their risk tolerance before buying any product.
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Pick the Underlying Security |
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The performance of warrants is tagged closely to the price performance of the underlying security. Investors should research
the outlook of the underlying security and determine the target underlying security price within investment period. Generally,
investors should only buy a call warrant if they are bullish on the underlying share.
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Select the Best Warrants |
Every warrant is unique i.e. different Exercise Price, Expiry Date, etc. Investors should compare features of various call
warrants of the same underlying security. The features are Effective Gearing, Premium, time to expiry, etc.
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 | Warrants Liquidity |
Most warrants are illiquid. Pick warrants managed by a good liquidity provider. |
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| Behaviour of Call Warrants |
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Warrant prices are determined by the market forces i.e. willing buyer and willing seller. In general, call warrant prices are
influenced by the change in (1) underlying security price, (2) risk-free interest rate, (3) Exercise Price, (4) dividends, (5) volatility
and (6) tenure or time to maturity.
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| The Six Myths of Call Warrants |
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 | Zero Sum Game - third-party call warrant issuers make money out of warrant investors. |
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This perception is wrong. When a warrant issuer issues call warrants, the warrant issuer needs to buy underlying shares to hedge the short warrant position at the inception of the call warrant issue.
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If a warrant issuer does not hedge the short call warrant position, the warrant issuer will be exposed to unlimited loss caused by rising underlying share price.
The Security Commission and Bank Negara Malaysia require warrant issuers to have a comprehensive risk management framework for hedging warrants issued. |
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 | A warrant issuer hopes that the underlying share price goes down so that it can earn the entire issue price. |
A third-party warrant issuer like CIMB does not take any view on the direction of the underlying share price. Instead, a warrant
issuer seeks to achieve neutral position in the option Greeks or risk variables such as delta, gamma, vega, theta, and rho.
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CIMB does not earn the entire issue price. The issue price is used for funding the initial purchase of underlying shares, the
subsequent delta hedging activities and listing expenses. As an issuer, CIMB provides investors with an alternative trading instrument
which limits the downside risk while retaining the upside potential of the underlying share.
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A warrant issuer issues call warrants with the hope to dispose shares. |
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A third-party warrant issuer like CIMB buys underlying shares to hedge its position at inception. CIMB will only dispose underlying
shares it bought at the inception of the call warrant issue as and when (a) underlying share price goes down, or (b) a call warrant holder
exercises a cash-settled call warrant. On the latter, if the call warrant is In-the-money, CIMB will need to dispose the underlying share
to pay the call warrant holder.
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| Cash Settlement Amt = No. of Call Warrant x(Closing Price-Exercise Price)x |
1 | x Settlement Exchange Rate |
| Exercise Ratio |
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 | You can trade call warrants indefinitely. |
| All call warrants have definite life. Call warrant holders are advised to consult their dealers on the expiry date of the call warrant. |
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A warrant issuer issues warrants at higher Exercise Price so that the warrant issuer can cash out at higher price. |
| This is really a trade off between the Exercise Price and the issue price. If the issuer issues a higher Exercise Price, the issue price of the call warrant will be lower and Cash vice-versa. So, a warrant issuer issues warrants based on investors’ preference during the launch period. |
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 | Call warrant is an illiquid instrument. You can’t liquidate once you buy the warrants. |
| Warrants with designated market makers are liquid. Warrants issuers are required to market make their warrants. |
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| Where to Obtain Information on Call Warrants? |
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1. Go to www.cimb.com/warrants
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You will be able to obtain information such as expiry date, strike price, premium, gearing ratio, historical charts and implied volatility of all warrants.
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2. Warrants Comparison
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To compare the attractiveness of various warrants, click Warrants Comparison. Scroll down the warrants that you want to compare.
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3. Warrants Calculator |
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To find the fair value of the warrants, click Warrants Calculator. Choose your warrants by scrolling down the warrant field. The spot price, interest rate, dividend yield and volatility are default values which you can change to access your assumption of fair value.
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| Disclaimer |
This material has been prepared by CIMB Investment Bank Berhad ("CIMB"), formerly known as Commerce International Merchant Bankers
Berhad exclusively for the benefit and internal use of the Investor in order to indicate, on a preliminary basis, the feasibility of possible
transactions. Terms contained in this material are intended for discussion purposes only and are subject to a definitive agreement. All
information contained in this material belongs to CIMB and may not be copied, distributed or otherwise disseminated in whole or in part
without the written consent of CIMB. This material has been prepared on the basis of information that is believed to be correct at the
time the material was prepared, but that may not have been independently verified. CIMB makes no express or implied warranty as to the
accuracy or completeness of any such information (including but not limited to information referring to existing products or securities
that are listed or not listed on Bursa Malaysia). CIMB is not acting as an advisor or agent to any person to whom this material is directed.
Such persons must make their own independent assessment of the contents of this material, should not treat such content as advice relating
to legal, accounting, taxation or investment matters and should consult their own advisers. CIMB or its affiliates may act as a principal
or agent in any transaction contemplated by this material, or any other transaction connected with any such transaction, and may as a result
earn brokerage, commission or other income. Nothing in this material is intended to be, or should be construed as an offer to buy or sell,
or invitation to subscribe for, any securities. Neither CIMB nor any of its their directors, employees or representatives are to have any
liability (including liability to any person by reason of negligence or negligent misstatement) from any statement, opinion, information or
matter (express or implied) arising out of, contained in or derived from or any omission from the material, except liability under statute
that cannot be excluded.
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For more information:
Telephone (603) 2084 9942
Email edu@cimb.com
www.cimb.com/warrants
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| CIMB Investment Bank Berhad (18417-M) |
(formerly known as Commerce International Merchant Bankers Berhad)
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