Introduction

Warrants is a security that works similar with options that gives holder the rights (but not
the obligation) to purchase the underlying stock of the issuing company at a fixed
exercise price until expiration date. It acts as a sweetener that attached along with bonds /
stocks and makes them more attractive to potential investors but paying them lower
interest rates or dividends. However, these warrants are detachable and can be sold
independently of the bonds / stocks.
There are two major types of warrants: a call warrant and a put warrant. A call warrant
represents a specific number of shares that can be repurchased from the issuer at a
specific price, on or before a specific date. A put warrant represents a certain amount of
equity that can be sold back to the issuer at a specified price, on or before a stated date.
For example: An investor who is optimistic about Genting Berhads future growth and
expected its share price will increase by the time or before the warrant expires will
purchase Genting Berhads call warrant and exercise it when its underlying share price is
higher than the warrants exercise price, or in another word, due to the warrant he
purchased, he is able to purchase Genting Berhads share at the pre-determined price and
will be able to sell it off at the market at a higher price and therefore gaining profit.
We have selected warrants as our investment product. Throughout this report, you will be
able to know about the characteristics of the warrant, type of warrant that we have chosen
and advantages & disadvantages of investing in warrant.

Summary on finance article

On 24th January 2014, RHB Investment Bank Berhad has announced the offering
of non-collateralised cash settled European-style call warrants over ordinary shares of
Bumi Armada Berhad (5210), Genting Berhad (3182), IOI Properties Group Berhad
(5249), MBM Resources Berhad (5983), My E.G. Services Berhad (0138), Perdana
Petroleum Berhad (7108), Scientx Berhad (4731) and Zhulian Corporation Berhad (5131)
and expected to be listed on the structured warrants board of Bursa Malaysia Securities
Berhad on 25th January 2014. *Refer to Appendix 2
RHB Investment Bank Berhad has been appointed as the designated market maker and
the warrant agent for the warrants. The warrants are cash settled warrants which entitle a
warrant holder to be paid in cash settlement amount (if positive) in accordance with the
terms and conditions of the warrants. The issue price of each warrant is RM0.15. Each
warrant have different conversion ratio and strike price and only can be exercised by 23rd
February 2015.
We have chosen Genting Berhads warrant as our investment product. To fully utilise our
capital of RM200,000, we are about to purchase about 1.3 million of Genting Berhads
warrant.
RM200,000 / RM0.15 = 1,333,333.33 (to be exact 1,333,300 units of warrants because
RHB Investment Bank Board Lot is 100 units.)
The main reason why we selected Genting Berhads warrant is because of its involvement
in many sectors which we are unable to see in remaining 7 companies, this means even if
they are having problem on operations of one of the sector, the company would not
collapse as fast as others because major of them rely on only 1 core business activities.
For example: Despite the shutdown of Genting Themepark for 2 years due to
maintenance, they are still able to generate revenue from their hotels & casino. Recent
major projects such as announcement of building a casino in South Korea in
collaboration with another China company on year 2016 will definitely increase its share
price as well. Genting Berhad is the company with most foreseeable future among the 7
companies which issued call warrants along with Genting Berhad.

Characteristics of warrants
The characteristics of warrants are as follows:
i)

Warrant premium

Warrant premium measures the percentage by which the underlying share price must
move up (for call warrants) before reaching the breakeven point of the warrant before
expiry, or how much extra percentage you have to pay by purchasing shares through
exercising your warrant compared to purchasing it directly in the market.
Warrant premium = 100 x [(Warrant Price + Exercise Price Current Share Price) /
Current Share Price]
Genting Berhads warrants premium is 13.86%.
ii)

Intrinsic Value

The intrinsic value is dependent on the price of the underlying share price and on the
warrants exercise price and it is classified by 3 categories:
In-the-money the warrant is worth exercising, the exercise price is lower than the price
of the underlying share.
At-the-money the price of the underlying share equals to the exercise price.
Out-of-the-money it is not worth exercising, the exercise price is higher than the price
of the underlying share.
iii)

Volatility

Volatility is defined as the extent to which the price of the underlying share fluctuates
during a specific period of time. The higher the fluctuation price range of the underlying
share, the higher the warrants price. Sharp fluctuations of the underlying share price
represent a bigger probability that the underlying share price will move sufficiently to
exceed the exercise price.
iv)

Time value

The time value of a warrant is the difference between the price of the warrant and its
intrinsic value. It can be interpreted as a price a warrant holder needs to pay for

exercising the rights attaching to a warrant as compared to a direct investment in the

underlying share. It decays over time.
For example, a warrant that is out-of-the-money and has remaining lifetime of six months
may not be worthless. The share could possibly rise and exceeds the exercise price. A
warrant with longer remaining lifetime is more valuable, since it is more likely to trade
in-the-money during its lifetime and hence a higher time value.
v)

Gearing & Effective Gearing

Gearing is the ratio of the share price to the warrant price which indicates the number of
warrants that you can buy with a certain amount of capital compared to buying the
underlying share.
For example, a gearing ratio of 10 indicates with same amount of capital you would be
able to buy 10 warrants rather than buying 1 underlying shares.
It also expresses the relationship of the warrant price movement to the price movement of
the underlying share. For in-the-money warrant, with a gearing of 10 times, this means
that if the underlying share rises by 1%, then the warrant price would rise by 10%. It
simply because the warrant price is lower than the underlying share price[1].
[1] : Refer to appendix 1

The effective gearing takes the delta into consideration. It provides a measure of the
actual gearing effect provided by the warrant.
Example: Genting Berhad
Share price: RM10.10, Warrant price: RM0.15, Conversion ratio: 10:1, Delta: 0.5461

(Normal gearing)
Gearing = Underlying share price / (Warrant price x Conversion ratio)
= RM10.10/ (RM0.15 x 10) = 6.73

(Effective gearing)
Effective gearing = Delta x gearing = 0.5461 * 6.73 = 3.68
Effective gearing offers a much more realistic picture. For a 1% rise in Genting Berhads
share price, the theoretical price of the warrant will go up by 3.68% instead of 6.73%.
Investors should therefore consider effective gearing rather than gearing when analyzing
several warrants.
vi)

Delta

Delta indicates the change in a warrants theoretical value, given a one unit change in the
price of the underlying share price. Lower delta indicates that the underlying share has to
work hard in order for the warrant to achieve any value while higher delta indicates lower
risk but offer little in a way of gearing to make the investment worthwhile. Most
investors will take a range of 0.4 to 0.6 as their comfort zone. Our chosen product is
within the comfort zone because of its Delta value of 0.5461.
Using example above: Price change in warrant = Delta / Conversion ratio = 0.5461/10
=0.05461
A RM1.00 change in the underlying share price will result in a warrant price change of
RM0.05. The deeper a warrant is in-the-money, the higher its delta.
vii)

Breakeven point

Breakeven point is the growth required from this point to warrant expiry for the warrant
holder to breakeven on his warrant investment.
Exercise price + (Purchase cost of SW + Exercise Expenses) x Exercise Ratio.
RM10.00 + (RM0.15) x 10 = RM11.5
Genting share price must exceeds this breakeven level before expiry date in order for our
investment to be In-The-Money.

Types of warrants
There are a few types of warrants available in Malaysia according to different aspects:
i)

Payment Method

There are two payment methods available which are cash-settled or physical delivery.
Cash settled is where the issuer pay directly to warrant holder the settlement amount
which is determined as follows:
(Settlement Price Exercise Price) / Exercise Ratio Exercise Expenses
*Settlement Price subjected to adjustment (Volume Weighted Average Price of the
stocks 5 days prior to the expiry date.)
*Exercise Expenses is equivalent to 0.30% of (Settlement Price Exercise Price) /
Exercise Ratio. *Refer Appendix 2 Subject 3.4 Note 2
For example: Genting Berhads warrant expired on 1st of March 2014 with a exercise
price of RM10.00 and exercise ratio of 10. The 5 days average closing price before expiry
date for Genting Berhad was RM11.00. The cash settlement amount is therefore:
(RM11.00 RM10.00) / 10 = RM0.10 (without deducting the exercise expenses.)
Warrant holder is entitled to receive RM0.10 for every units of warrant they hold.
While the physical delivery warrant requires issuer to issue new shares (for call warrants)
or requires holder to acquire shares from the market (for put warrants) to facilitate the
warrant exercise.
ii)

Collateralised vs Non-collateralised

Collateralised warrant is where the performance of issuers obligations is secured by the

deposit of the securities or assets underlying the derivative warrant with an independent
trustee who holds the securities or assets for the benefit of the warrant holders. This
means that they would be responsible to warrant holders if they did not do well in order
to increase their share prices.

Non-collateralised warrant is where the performance of issuers obligations is not secured

by the deposit of the securities or assets with an independent trustee. Which means the
company will not be responsible to our loss if the certain companys share price dropped.
iii)

Exercise date

American-style warrants is which holders will be able to exercise their warrants anytime
before the expiry date. European-style warrants is which holders will only be able to
exercise their warrants on the specified expiry date.
The warrant that we have purchased is non-collateralised cash settled European
style call warrant, therefore Genting Berhad will have no obligations / responsibility
towards us regarding their share price performance, we dont have to allocate another
sum of money to purchase the shares of Genting Berhad since it is cash settled and we are
only able to exercise it on that specified date.

Advantages of investing in call warrants

i)

Warrants can provide leverage.

To invest in warrant, investors will only have to pay a relatively small premium
compared to investing on the underlying shares itself. The potential profit on warrants
can be far greater in percentage terms than the potential profit on the underlying shares.
For example: If shares of Genting Berhad rise by 2.5% today. (Provided that the warrant
is is not expiring.) Due to the gearing effect, its warrants price may increase by more
than 2.5% depending on the gearing ratio.
ii)

Unlimited gains, limited losses.

In a worst case scenario, the investor may lose the entire premium, which is still a small
amount compared to losses that could have been made on futures which investors may
lose beyond their invested capital.
iii)

Alternative to ordinary options

Warrants also offer an alternative for investors to diversify their investment portfolio and
allow them to profit in more dynamic market circumstances.
iv)

No liquidity issues to worry for.

As we have mentioned during the types of warrant, our selected investment product
which is cash settled warrant doesnt requires us to purchase the companys underlying
shares and resell it on the market when we exercise it. In fact, we receive our payment
directly from the company upon exercising the warrants depending on the amount of
(underlying share price warrant price).
v)

Not causing dilution of shares to existing shareholders.

This only applies on the type of warrant we have chosen which is cash-settled. The
issuing company doesnt have to issue additional shares for us and instead they only have
to pay us the difference between price of the underlying share and the exercise price.

Disadvantages of investing in call warrants

i)

Complexity

You need your brain switched on when dealing with warrants, they are not as simple as
shares and they can get confusing at times. When you buy a share you are buying a slice
of a company, which is easy to understand. Derivatives are by nature less straightforward,
deriving their value from another instrument and therefore being one extra step away
from the profits, assets and true value of a company. Sufficient research must be done
before considering warrant in your investment portfolio.
ii)

Gearing

Gearing may help investors to earn lot of profits when the underlying share price
increases, of course, it may also decrease as fast as it rises. Market timing is very
important, if you get it wrong then the results can quickly become painful. Remember
warrants are not buy-and-forget instruments. When things go wrong the performance can
decline very quickly which eventually cost you the entire investment amount.
iii)

Different characteristics from shares

Although the price of warrant and also the decision of whether to exercise or not to
exercise the warrant relies on the price of the underlying shares, however warrant holders
does not have same privileges as shareholders such as receiving dividends, attending
general meeting or even voting rights.
iv)

Restriction on maturity date

The type of warrant that we have chosen, which is European-styled warrants only allow
investors to exercise their warrants on the specified date. The amount invested is locked
up and we may not be able to turn it into cash quickly when we need it. However, the
warrants are able to be sold on secondary market.

Conclusion
As you can see, warrant is an interesting financial instrument which can provide
leverage and also brings you unlimited profit (Only applicable to Call). The complicated
characteristics and also calculations required may stop many potential investors from
investing into it, but with sufficient research and a little bit of luck, you may be able to
earn some profit through warrants.
However, in Malaysian context, warrant investment is not as popular as Hong
Kong or Singapore where warrants are actively traded. As at 10th of March 2014, trading
volume of Genting Berhads warrant which we have purchased (GENTINGC16) is still 0.
This is mainly because investors in Malaysia have no knowledge about variety of
investment vehicles available and due to peer influence, their only concept about
investing is trading stocks, therefore majority of them only active in trading stocks, some
even enter into the battlefield without equipping any knowledge and lose their money.
As we progress along this profession in future, we will be able to know about
more types of investment vehicles and should therefore recommend investors to consider
adding them into their portfolio so that they dont put all eggs into one basket, therefore
reducing their risk.
In conclusion, warrant is a worthwhile investment provided that you have made
enough analysis and always understand about the consequences before making decision
of investing in warrant. There are also another alternative available other than warrant if
you depending on your risk tolerance level. Always remember, if you expect high return,
you will have to bear higher risk!