Unlike shares, warrants have an expiry date and therefore a limited life. As time passes, the time value of a warrant decreases and eventually reaches zero when the warrant expires (except in the case of zero-strike call warrants). This is known as “time decay”. That is, it costs money each day to hold the warrant and do nothing with it. It is important that you monitor the warrant’s expiry date and performance. Warrants are intended more for trading purposes.

A warrant may expire before your expectations are realised, making it worthless. Therefore it is essential that you select a warrant that has sufficient time to expiry to match your market expectations.

Call Warrants are subject to adjustments to take into account any corporate actions arising from the underlying stock, or component stocks in the basket. Corporate actions such as rights issue, bonus issue, share splits or consolidation may lead to a diluting or concentrative effect on the theoretical value of the underlying stock or basket. This may result in adjustments to the entitlement, the exercise price or other variables of the Call Warrant.

For index Call Warrants, adjustments are normally not required on the warrant terms for corporate actions related to the component stocks in the index. This is because the underlying index will have already adjusted itself to take into account such corporate actions.

• Underlying asset price
• Exercise price
• Volatility of the underlying asset price
• Time to expiry of the warrants
• Interim interest rates
• Dividend yield of the underlying asset
• Credit worthiness of the issuer
• Supply-demand factor on the warrants

If you hold a Call Warrant, the value of your warrant should appreciate if the underlying share price has risen, assuming other factors remain constant. You can realise the value of the warrant by selling the warrant in the market. Alternatively, if the warrant is American-style, you can exercise the warrant to buy the shares from the issuer at the exercise price instead of the current market price. Your gain is the difference between the exercise price and the current share price. You can realise this gain immediately by selling the shares in the market (the result would be similar to the case when the warrant is cash settled).

Normally, you would realise more value by selling the warrant, instead of exercising it, if there are still many days remaining before expiry and when there is still “time value”. You would only exercise the warrant if the warrant price is below intrinsic value, or because you want to own the underlying shares for some reasons, e.g. to be entitled for the dividend due.

• Issuer
• Underlying Asset (e.g. share, a basket of shares, or an index)
• Warrant Type (i.e. Call or Put)
• Warrant Style (e.g. European or American)
• Exercise Price (or Strike Price)
• Expiry Date
• Entitlement or Conversion Ratio (e.g. 1 warrant entitled to 1 share)
• Settlement Method (i.e. either physical settled or cash settled)
• Warrant Price (from which values for Premium, Gearing, Implied volatility, Delta, etc. are derived)

• A Call Warrant issue is “fully-collateralised” if the issuer deposits the relevant amount of underlying securities with an independent trustee in order to secure the obligations of the issuer and adequately protect the interests of the warrant holders.
• A Call Warrant issue is “non-collateralised” if the issuer provides for its obligations in a form other than by way of charge over the underlying securities. The issuer usually adopts dynamic hedging strategies to provide for its obligations under the warrants.

Covered warrants (or structured warrants) are issued by a company (usually a bank or securities firm) on shares of another listed company, basket of shares or an index.
In many countries, only covered call warrants (or “Call Warrants” under the SC’s Guidelines for the issue of Call Warrants) in the form of “fully-collateralised” or “non-collateralised” Call Warrants are currently permitted to be issued by authorised banks or universal brokers approved by the SC. Put Warrants are not yet permitted under the Guidelines.

A warrant is an option in the form of a title. There are two basic types of warrants. Vouchers have a fixed duration (maturity) and, if not exercised, are worthless after their expiration date.