Warrants

Like an option, a warrant is a security that gives its holder the right to buy or sell a given quantity of an underlying asset at a pre-determined price, on or before an agreed expiry date. This means a warrant becomes worthless after its expiry date. The SGX has two types of listed warrants - traditional corporate warrants which have been around for many years, and the new structured warrants. While both these warrants may appear similar, many investors do not realise there are a number of major differences that affect their liquidity and market value.

As its name suggests, a corporate warrant is issued by a listed company, which makes use of its own shares as the underlying asset. Often, it is a sweetener during a fund raising exercise to entice shareholders to subscribe for a rights issue or bond issue. Corporate warrants typically have a lifespan of between three to five years. They can be exercised at any time before the expiry date into new shares, which will be issued and delivered by the company. While this helps bring additional funds into the company's coffers, the new shares created will cause earnings dilution for existing shareholders. A key distinction between a corporate warrant and a structured warrant is that the latter is issued by a third party, usually a bank or financial institution, on the existing shares of an unrelated company. As new shares are not created when these warrants are exercised, the company's shareholders will not have to be concerned with earnings dilution. Structured warrants also have a shorter lifespan, typically expiring within a period of two years.

Moreover, a company can only issue call warrants, meaning that holders can only exercise the right to buy the underlying shares. In contrast, a structured warrant can only be issued as either a call or put warrant. This is an important difference. As put warrants give holders the right to sell the underlying shares, there is flexibiliy for investors to take a trading position if they expect the share price to decline. In addition, put warrants also create opportunities for a wider range of hedging strategies, which we will discuss in more detail in future. As corporate warrants are usually issued to the company's shareholders during a fund raising exercise, they tend to be owned mainly by individuals and institutions. Due to their minimal cost, these warrants are usually tightly held which means there is restricted trading liquidity.

Structured warrants, on the other hand, are more market-driven products. To ensure a warrant is well traded when it is listed, the issuing institution has to tailor it to appeal to the needs of savvy private investors. The institution also has an oblighation to act as a market maker, which means it has to provide competitive bid and ask prices for the warrant. The ease of buying and selling structured warrants has made it an attractive choice for investors, as compared to corporate warrants. While this ready source of liquidity has been a big draw for the structured warrants market, another major reason for its success is the leverage these instrumnets provice investors to profit from movements in the underlying stock.

Source : Pulses, Aug 2007

Certificates

What are certificates and what types of certificates are available on the SGX?

Certificates are issuer-led structured financial products that offer investment opportunities based on different market themes and expectations.

Before investing in certificates, it is important that you read and understan the nature and risks of such instruments. You should carefully consider whether such trading is suitable for you in the light of your financial objective and situation.

Types of Certificates

a. Participation Certificates

Participation Certificates are essentially zero strike warrants. With an exercise of ( close to ) zero, such certificates will track the performance of the underlying asset(s) such as single stocks, stock indices and thematic indices etc. with no leverage or a gearing ration of one.

Investors buying a participation certificate will have synthetic ownershp of the underlying shares without the entitilement of dividends and will effectively replicate the performance of the underlying. Upon maturity, cash settlement will be executed and the certificate will be redeemed for cash at market value on the valuation date.

b. Discount Certificates

Discount Certificates, also known as a call spread warrant, are financial instrunments that allows an investor to buy into the performance of an underlying asset at a discount to its actual price. The potential gain to the investor is limited to a maximum amount from the onset (cap). This cap is fixed when the instrumnet is issued and remains constant for the entire lifetime of the instrument.

c. Daily Lock-in Certficates

Daily Lock-In Certificates are structured products with a daily accrual feature where the investor accumulates a lock-in amount throughout the life of the certificate if the underlying shares or indices perform in a certain way ( for example, the underlying price does not fall below 88% or above 95% of the intial price level). These products may have specific feature which investors should also consider, for example a knock out feature where the certificate will be subject to early termination and settlement.

Interpreting the Trading Name of Certificates

As Certificates are products customized by the respecitive issuers, the trading name of Certiificates will start with the issuer code followed by the product information. In general, the features below willl be reflected in the trading name.

1. Issuer
AA ABN AMRO Bank
DB Deutsche Bank
RB Rabobank

2. Product Type
ZPC Participation Certificates
DC Discount Certificates
DLC Daily Lock-In Certificates

3. Underlying Instrument
This information may not be indicated depending on the product structure.

4. Special Features ( if any )
. Products that are exotic
K Procducts with a knock-out feature

5. Expiry Date
The expiration date is represented in this format, yy mm dd.

Source : Pulses, july 2007

NCC - service for month Sept

02/09 - Cam 1, 4th session
09/09 - Cam 1, 3rd session
16/09 - Cam 2 training, 2nd session
22/09 - Cam 5, SIS, sat
27/09 - Cam 4, thurs
30/09 - Cam 2 training, 2nd session

Makan catalog

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Birth of My Blog

7th August 2007.
This day is the birth of my Blog.