Macquarie Warrant Hotshot Competition

For those who have been trading options, you will realize that there are a lot of virtual trading platforms out there for you to practice your strategies and polish up your skills. Unfortunately, this is not so true for warrant trader. I do my own virtual trade on a spreadsheet I created but then it lacks the real time data feed.

Macquarie is organizing the second Warrant Hotshot competition which is a real-time simulated trading contest designed to improve your knowledge of warrant investing without risking any capital. In fact, you could stand to win the S$20,000 Grand Prize if you are crowned Singapore's Warrant Hotshot.

The Hotshot contest is suitable for investors of all skill levels from newcomers to experienced warrant traders. Participants will begin the contest with S$100K Hotshot dollars and prizes will be awarded to those who are able to generate the largest profits by trading Macquarie warrants in the simulated trading environment. Warrant prices in the contest will mirror the real warrant prices on the SGX.The competition will be segmented into four main categories: dealers, investors, media and students, with participants from each category competing against each other for the weekly and group prizes. There will also be a grand prize winner for the investor with the largest portfolio at the end of the competition.The contest is scheduled to start on 14 July 2008 and will run for a period of 8 weeks. Please click here to register.

You can register under the appropriate category. For convenient sake, I have re-posted the Rules and Regulations here for your reference.

Introduction

Macquarie is pleased to present the second Macquarie Warrant Hotshot contest to investors. The contest is designed to give new and existing warrant investors the opportunity to experience trading warrants in a real-time simulated environment. Live pricing for both warrants and their respective underlying will mirror those seen on the SGX main board.

Eligibility

• Participants must be aged 21 years or above at the time of registration.
• All staff and their immediate family members of Macquarie Capital Securities (Singapore) Pte. Limited (Registration Number 198702912C) and Macquarie Capital (Singapore) Pte. Limited (Registration Number: 199704430K) and their related body corporate are not eligible to receive any prizes in this Macquarie Warrant Hotshot contest.
• Participants can be of any nationality.
• Participants must be residing in Singapore.
• To be eligible for any prize, the following conditions must be met:
1. The Participant must have complied with the rules and regulations stated.
2. The Participant must have completed at least one (1) buy trade (using the virtual cash in the Hotshot Account) during the term of the contest.
3. The Participant must not have been disqualified from the contest.

Registration

• Participants can sign up for only one Hotshot Account. Participants must register their own personal particulars, and not use another person's particulars to register for the contest. Participants must not trade using another participant's Hotshot Account.
• Participants must register using their names as stated in their NRIC or Passports. NRIC or Passport numbers registered must be valid and accurate to be eligible to win a prize. Participants who fail to produce a valid form of identification will not be awarded cash prizes should they be declared winners for the respective prizes. Driver licenses will not be acceptable.
• Participants must register in their appropriate category i.e. Remisiers and Dealers, Private Investors, Media and Students. Any participant competing in the Remisiers and Dealers, Media or Student categories will be asked for proof of their employment within these industries (or proof of study for the student category) before any prizes are awarded. A letter from their respective companies and institutes of learning, along with their NRIC or passport may be required for verification. Participants working in any publishing, or broadcasting company qualify as Media participants. Participants who have doubts as to whether they qualify for a particular category may contact the warrants team at 1800 288 880. Any participant competing in the wrong category will not be eligible for any prizes.
• Participants must agree to be bound by the Rules & Regulations set by Macquarie Capital Securities (Singapore) Pte. Limited.
• Macquarie Capital Securities (Singapore) Pte. Limited reserves the right to change the Rules & Regulations of the contest, and will disqualify any participants breaching the rules stated herewith.
• Macquarie Capital Securities (Singapore) Pte. Limited also reserves the right to disqualify any participants attempting to tamper the trading system or influence the warrant prices by manipulating the underlying prices. Any breach of market misconduct will be reported to the SGX and / or the Monetary Authority of Singapore.
  Participants can sign up for the contest anytime from 30 June 2008 9am by completing the registration form online at http://www.warrants.com.sg/.
• In case of any dispute, Macquarie Capital Securities (Singapore) Pte. Limited will have the final discretion in the award of any prizes.

Contest & Prize Details

• The contest will last for 8 weeks, starting at 9:00 am on 14 July 2008 and ending at 4:59 pm on 5 September 2008.
• Each participant will start the contest with an initial credit of 100,000 points, with every one point being the hypothetical equivalent of one Singapore dollar.
• There is a "reset" option (My Portfolio -> Personal Portfolio), where players can start over with a credit of 100,000 points, and have their previous trades deleted. They will not be eligible for the Weekly Hotshot Prize for that particular week. However, they will still be eligible for the Grand Hotshot Prize as well as the Category Hotshot Prize.
• There will be 4 categories: 1) Remisiers and Dealers 2) Private investors 3) Media 4) Students. Participants can track the names of the top 5 Hotshots in each category on the contest website.
• There will be four winners for the Weekly Hotshot Prize each week. The weekly winners will be the participants in each of the four categories with the highest percentage gain in his or her portfolio that week. The percentage gain in the portfolio is measured from the close of market on Friday that week, and comparing it to the Friday before. E.g. For the week starting 21 July 2008 and ending 25 July 2008, the percentage gains for that week will be calculated as:
  

  (P25 - P18)/ P18 x 100%
  

  where P25 is the total credits of the portfolio at the close of 25 July 2008 and P18 is the total credits of the portfolio at the close of 18 July 2008.

• For warrants over Singapore stocks, the market value of a participant's holdings will be calculated based on the warrant bid price at 4:59 pm.
• For warrants over Hong Kong stocks, the market value of a participant's holdings will be calculated based on the warrant bid price at 3:59 pm. For warrants over Hang Seng Index ("HSI"), the market value of a participant's holdings will be calculated based on the warrant bid price at 4:28 pm.
• After 8 weeks, there will also be one Category Hotshot Prize winner in each category. This will be the participant with the largest portfolio value in terms of credits from each category, regardless of when the participant joined the contest.
• After 8 weeks, there will be one Grand Hotshot Prize. This will be the participant with the largest portfolio value in terms of credits, regardless of when the participant joined the contest. Do note that the winner of the Grand Hotshot Prize will also be the winner of his or her Category Hotshot Prize, and could potentially be the winner of the Weekly Prize for the last week. However, only the cash value of the Grand Hotshot Prize will be awarded.
• The cash value for each of the prizes is stated below:
1. Grand Hotshot Prize: S$20,000 for the grand winner.
2. Category Hotshot Prize: S$3,000 per winner (total 3 winners)
3. Weekly Hotshot Prize: S$200 per winner each week (total 32 winners)
• Participants are allowed to win weekly prizes more than once.
• To be eligible for any prize, the following conditions must be met:
1. The Participant must have complied with the Rules & Regulations stated herewith
2. The Participant must have completed at least one buy trade (using the credits in the Hotshot Account) during the duration of the contest.
3. The Participant must not have been disqualified from the contest.
• In the case of a tie, the prize will be split equally among the relevant participants. For example, in relation to the Grand Prize, a tie for Grand Prize between two Participants means that both will share the cash prize of $20,000 equally between themselves i.e. S$10,000 each.
• All winners will be notified by mail at their registered address in Singapore. Prizes must be collected within a month from notification.
• If a participant's portfolio ranks among the top weekly or overall portfolios in each category in terms of performance, their registered name in their NRIC or Passports and/or their portfolio/holdings may be displayed on the contest website or in the newspaper. All Participants who win a prize shall agree to allow their names and photographs to be used in public communication medium such as, but not limited to newspaper, internet or television.

Trading Details

• Orders placed to buy or sell Macquarie warrants can be executed at any time of the day during trading hours (9:00 am - 12:30 pm, 2:00 pm - 4:59 pm). Participants will not be able to execute orders during the pre-open matching period (8:30 am - 8:59 am) and the pre-close matching period (5:00 pm - 5:05 pm).
• For warrants over Hong Kong underlying stocks, these will trade according to the Hong Kong market trading hours: 10:00 am - 12:30pm, and 2:30pm - 3:59pm. Participants will not be able to execute orders during the pre-open and pre-close matching periods also.
• For warrants over the HSI, these will trade according to the Hong Kong Hang Seng Index Futures trading hours: 9:45 am - 12:30 pm, and 2:30 pm - 4:28 pm.
• Price quotes for Hong Kong stocks will not be displayed on the contest website. There will be a link to take participants to the relevant webpage on the Hong Kong Stock Exchange website, where prices are quoted with a 15 minutes delay. However, the price quotes for warrants over Hong Kong stocks will be live.
• Quotes for HSI will not be displayed on the contest website. There will be a link to take participants to the relevant webpage on the HSI website. The price quotes for warrants over the HSI will be live.
• All orders for the day will expire if they are not matched by the end of the trading day. However, orders placed after markets close will be saved in the system and matched at the first minute after the respective markets open.
• Should a participant execute a large order, such as buying 1 million warrants on the offer when there is only 200,000 on the screen, the contest trading platform will execute the order in multiples of 200,000 with a 2 second lag e.g. Buy 200,000 warrants, and the next 200,000 warrants will be bought only after a 2 second lag. This feature attempts to simulate the real world, where issuers will replenish the volume on the offer at the same price in the warrants should the underlying share price not move and there is sufficient volume in the underlying for issuers to hedge their positions.
• Orders executed in the contest will be done immediately to simulate real time trading. However, participants should note that if the bid / offer quote in the warrant is $0.20 / $0.205, and if participants wish to buy the warrant and get their order filled immediately, they should pay the offer and buy the warrant at $0.205. If they choose to bid at $0.20, their order will be filled only when the warrant ticks down to $0.195 / $0.20.
• Participants can cancel or reduce the quantity of their buy and sell order if such an order has not been filled, i.e. in the 'Pending Orders' section.
• To increase the quantity of an order, a new order entry has to be made.
• Once an order has been filled, the order cannot be cancelled or amended.
• No odd lots may be traded. The minimum volume is set at 1,000 warrants or 1 board lot.
• Short selling of warrants will not be allowed. Participants can only sell warrants which they own, as there will not be a buy-in market for participants with overnight net short positions for the duration of the contest.
• In the event that an underlying stock is placed on a trading halt, the corresponding warrants will be placed on a trading halt in the contest.
• If an order is placed for a warrant whose underlying is on a trading halt or suspension, the order will not be processed until the trading halt or suspension is lifted.
• If a Participant holds a warrant whose underlying is on a trading halt or suspension, the warrant cannot be sold until the trading halt or suspension has been lifted. If there is a trading halt or suspension on an underlying stock at the end of the contest, the last quoted bid / offer price in the warrant before the trading halt or suspension will be used for the final valuation of the warrant.
• If an underlying stock is delisted on the SGX market, the corresponding warrants will be delisted in the contest.
• If a company and its corresponding warrants are delisted, a Participant's warrants will hold no value and its value will be removed from the Participant's portfolio.

Payments & Sale Proceeds

• There are no brokerage commissions, clearing fees, GST and any other miscellaneous charges in the simulated trading environment of the contest. Participants' profits and losses will be based on the capital gains and losses from trading the warrants.
• There will be no margin financing option in the contest.
• There will be no contra period for any warrants purchased. The payable amount will be immediately deducted from the participants' 'Cash Balance'.
• When submitting a buy order, there will be a check for sufficient funds (credits) in the participant's Cash Balance. Once a buy order is completed, the required amount will be immediately deducted from the participant's Cash Balance. If the order is rejected because the participant does not have enough 'Cash Balance', the participant needs to adjust the quantity of warrants or the limit price.
• When the participant's sell order has been executed, the sales proceeds will be immediately credited into the participant's Cash Balance. Under Realized Profit/ Loss, the participant can monitor the amount of realized profits or loss, if any.

Adjustments to Warrant Terms

• Ordinary dividends are incorporated into the price of a warrant so that on the ex-dividend date when the share price falls by the amount of the forecast dividend, the warrant price should not change.
• Special dividends, capital reduction and or any other corporate measures undertaken by a company may affect the price of the warrants. Macquarie will issue an official announcement on the SGX, stating the details of the adjusted strike prices and entitlement amounts on both the SGX website and Macquarie's Warrants Homepage. The adjusted strike prices and entitlement amounts will be automatically updated in the contest.

Investment Warrants

• Investment Warrants are a new type of warrant that Macquarie introduced to Singapore early in 2008. Different from conventional 'trading' warrants currently traded on the SGX, which typically have a contract expiry of three to six months, Investment Warrants have lower exercise prices and longer expiry dates, therefore giving them lower holding costs and a lower risk profile than conventional trading warrants.
• Investment Warrants allow investors to receive net ordinary dividend equivalent payments. Thus if a company declares a 50 cent net ordinary dividend, the investor will receive the full 50 cent equivalent payment if you purchase the proportionate number of Investment Warrants to entitle you to 1 underlying share. For example if you were holding an investment warrant with a warrants per share number of 10:1 and the underlying share announced a dividend of 50 cents, each warrant that you hold would be entitled to 5 cents (i.e. 50 cents divided by 10)
• On the SGX these dividend payments are distributed to the holder within 5 days of the dividend payment date. In the contest they will be credited to the investors account on the day of the ex-dividend date as the contest will only last eight weeks while the dividend paid date may be longer than the duration of the contest.
• Special dividends, capital reduction and or any other corporate measures undertaken by a company may be adjusted in the same way as a conventional trading warrant (see section above)

All the best to those who are participating in the contest.

Actual Operation of Warrant Trading (Part 4)

In this post, I’ll discuss a rather simple topic on the “Actual Operation of Warrant Trading”. This post will focus on the continuous quote of warrant trading. In Singapore, market makers provide liquidity to the market under a continuous quote system.

There are however under some circumstances that market makers will not be able to provide any quotation. The following is a list of such situations.

1. When the warrant is suspended from trading for any reason, including, without limitation, as a result of its underlying being suspended from trading;
2. In the event of the occurrence of a market disruption event, including, without limitation, any suspension of or limitation imposed on trading (including but not limited to unforeseen circumstances such as by reason of movements in price exceeding limits permitted by the SGX-ST or any act of god, war, riot, public disorder, explosion, terrorism or otherwise ) in a stock, or any warrant, option contract or futures contract relating to the stock;
3. When the issuer and/or the guarantor hold(s) less than 5% of the total issue size of the warrant (in which event, quotes will be for bid price only), that is, when the guarantor and its group of companies hold, in their proprietary position, less than 5% of the total issue size of the warrant, which, for the avoidance of doubt, shall exclude any unit of the warrant held by the guarantor and/or its groups of companies in a fiduciary or agency capacity;
4. During the period of five business days immediately prior to the expiry date of the warrant;
5. If the stock market experiences exceptional price movement and volatility, that is to say, during fast market; and
6. Where the market maker faces technical problems affecting the ability of the market maker to provide bid and offer quotations.

The most commonly seen situation is case 4 when the warrant is not tradable any more. I hope this post will give a rough idea to investors to the different situations why there are times when warrants do not have any quotes. In the next “Actual Operation of Warrant Trading” posting, I’ll be discussing about the calculation of warrant settlement price for both equities and index.

How to compute the historical volatility of index and equities?

In this post, I’ll divert from the discussion of the “Actual Operation of Warrant Trading” and talk about how various issuers of warrant compute the historical volatility of index and equities. In fact, what I am going to illustrate later can also be applied to the US market to compute the historical volatility of index and equities.

Some of my readers may be wondering why we should ever bother about computing the historical volatility since these events had already happened. I have the same thoughts too until my last WAT gathering when Greekman shared with us the expected move formula and it struck me that why did I not think of that? Let me go through the computation before we move on to make some modification to the formula and see where we can go from there.
I am using the Straits Time Index (STI) as an example here to compute the historical volatility. I have done some screen captures from different issuers to show what the historical volatility of STI is after market closed today.

From the above screen captures, we can see that the historical volatility is around 15.01%. We are not concern about the different terms of warrant chosen as long as they all have the same underlying; their historical volatility should be approximately the same.

The screen capture below is a spreadsheet where I used to compute the historical volatility of STI index. Notice the value I got is quite close to the one shown on the previous screen captures.

Let walk through how each value is being computed. Under the column with the heading showing “Straits Time Index”, the value in each of the cell shows the closing STI index value on that day. Take note that we do not include weekend or any non trading day. For example, we do not include 19th May 2008 as it is Vesak day.

Under the column with the heading showing “Percentage Change”, the value in each cell is computed based on the natural logarithm of the prior day closing index and today closing index. Take for example, the percentage change on 18th June 2008 is computed as follow, Ln(3040.09/3028.24) = 0.39%.

Once we have all the various percentage change calculated for the last 30 days, not including the one on 19th June 2008, since this is a historical volatility. To compute the historical volatility for last 30 days, we first find the standard deviation of the percentage change from 8th May 2008 to 18th June 2008 and then multiply it with the square root of 250 or 252; the number of trading days in a year. That is Stdev(-1.78%, -0.31%, 0.57% ….-0.29%, 0.39%)*Sqrt(250) = 15.02%. The reason why we multiply the standard deviation with the square root of the number of trading days is to annualize the historical volatility.

Based on the theory of statistic, if the sample is 30 and above, we can assume the distribution to be normal. This is why I have chosen 30 days and nothing less. Assuming if the STI index does follow the normal distribution, then there is a 68% of the time the STI index will fall within 2992.66 * (1 ± 15.02% * Sqrt (30/250)), which gives us a range of 2836.95 to 3148.37. We multiply the historical volatility with the Sqrt(30/250) to de-annualize it. For those who attended the last WAT gathering, do you find this formula familiar? What happen if we substitute the 2992.66 with half the current equity share price, the 15.02% with the ATM option implied volatility and the 30 with the days to expiration of the option? Effectively, this gives us an idea of how much the share price will move towards the expiration date.

I certainly hope you enjoy this as much as I do. I shall be posting the “Actual Operation of Warrant Trading (Part 4)” soon.

Actual Operation of Warrant Trading (Part 3)

This is the third part of the Actual Operation of Warrant Trading. In this post, I’ll discuss about the face value of warrant. Some investors prefer warrants with a smaller face value, because they cost less to buy and the tick value is lower, and they are more sensitive to the movement of the underlying price. However, other investors prefer warrants with a bigger face value, on the grounds that, with their higher tick value, one tick will be enough to pay the brokerage commission.

So, is it a better strategy to buy warrants with smaller face value or those with a bigger face value? Lets us find it out by comparing transaction costs and how closely the warrant price will follow the movement of the underlying price.

Let us start with transaction costs. Assume that the bid/ask spread of the warrants is one tick across the board. For a warrant with a face value of no more than S$1.00, say S$0.50, the tick value is S$0.005. This is also the minimum transaction cost for buying and selling the warrant, with the underlying price remaining unchanged. For another warrant with a face value within the range between S$1.00 and S$9.99, say S$5.00, the tick value of the warrant is S$0.01. It seems that the warrant with a bigger face value is more costly. In fact, this is not true. In percentage terms, the transaction cost is actually higher for warrants with a smaller face value. In the case here, the warrant with a smaller face value, S$0.005 / S$0.50 * 100 = 1%, compared with the warrant with a bigger face value, S$0.01 / S$5.00 * 100 = 0.2%. Hence, the trading risk is relatively lower for the latter.

Besides, a warrant with a smaller face value is more likely to follow closely the movement of its underlying. Say, we have two warrants, both with a delta of 0.05 and a conversion ratio of 10:1. For the one with a smaller face value, its tick value is S$0.005. When its underlying goes up by S$0.10, the warrant will in theory, climb by 1 tick (S$0.1 * 0.05 = S$0.005). As for the warrant with a bigger face value, its tick value is S$0.01. When the underlying goes up by S$0.10, the warrant will appear to be not moving at all, as the increase in its price is less than a tick (S$0.005 = ½ tick).

Face value may be more relevant to investors looking for fast money. For ordinary investors, it does not mean much whether it is S$0.005 or S$0.01 a tick. Of course, we always want to buy something at a lower cost if possible. Nevertheless, you are advised not to be too concerned with the tick value, but spend more time studying the terms such as effective gearing, to find out the most suitable warrant for your portfolio.

Actual Operation of Warrant Trading (Part 2)

This post is a continuation from where I stopped back in April. In this post, I will discuss about the bid/ask spread or in option trading world, it is commonly known as the slippage, of warrant trading.

Short term investors will find warrant trading attractive only if at least two conditions are satisfied. Firstly, there must be sufficient liquidity in the market so that warrants can easily change hands. Secondly, the bid/ask spreads must be narrow enough to keep transaction costs low. Since market making was introduced, liquidity is no longer a problem. Besides, as competition gets more and more intense, market makers are also maintaining their bid/ask spreads within a tight range. However, at times some warrants do trade with a rather wide spread. Well, then, how are bid/ask spreads determined?

The first factor to consider is delta. Given a conversion ratio of 1:1, the higher the delta (that is, close to 1 or 100%), the narrower the gap in the bid/ask spread between a warrant and its underlying. Let us say that the bid/ask spread of the underlying is S$0.02. If the warrant has a very high delta, it’s bid/ask spread will be close to S$0.02. However, if the conversion ratio is 10:1, the bid/ask spread of the warrant will be around S$0.002.

Let use an actual example to see if that is the case. The screen capture below shows the bid/ask price of some warrant with delta close to 100% on June 13, 2008. The next screen capture shows the buy and sell price of some counters from SGX on the same date. Noticed in the first screen capture, three out of the four warrants in the screen capture that are very close to expiration have delta close to 100%. This should be the case since the three warrants are deep ITM with around two weeks to expiration. The only warrant with a delta close to 100% and more than two months to expiration is DBS BNP ECW080905. We shall use this as an example.

Based on the second screen capture, the bid/ask spread of DBS is S$19.10 – S$19.06 = S$0.04 and the entitlement ratio is 8. This means we should expect the bid/ask spread of the warrant to be around S$0.04/8 = S$0.005. However, based on the first screen capture, the bid/ask spread for DBS BNP ECW080905 is S$0.535 - S$0.51 = S$0.025. This is 5 times more than what we expected. How about the theoretical bid/ask spread of a warrant? We can compute this by multiplying the delta of the warrant with the tick value of the underlying. Hence, the theoretical bid/ask spread for DBS BNP ECW080905 is 90.22% * S$0.02 / 8 S$0.002. Since the bid/ask spread of the warrant is also subject to the different tick values of different price ranges set by the stock exchange, we will expect the warrant bid/ask spread to be S$0.005 (the minimum bid size for price range up to S$0.99) which is consistent with the expected S$0.005 bid/ask spread we calculated earlier on. Hence we need to find out why is the actual bid/ask spread 5 times more than the theoretical spread? This will lead us to the second factor.

The second factor to consider is the liquidity of the underlying. Once a warrant is issued, the issuer has to make the necessary hedging arrangements. Buying some holdings of the underlying is one of the methods. If the liquidity of the underlying is inadequate, the cost of hedging will be high. Hence, issuers will work out an estimate of the size of the float of the underlying they can buy or sell at the optimal price before setting the bid/ask spread of the warrant.

In the case of DBS BNP ECW080905, the delta is 90.22% and the bid/ask spread of the underlying (DBS) is S$0.04; therefore the warrant bid/ask spread should be around S$0.005. Since the conversion ratio is 8:1, this means for every 8 units of warrant the issuer needs 1 unit of DBS share to hedge its position. The outstanding warrant as on June 13, 2008 was 50, 000, 000. This is shown in the screen capture below.

Assuming this value is accurate, this means that the accumulated overnight positions, held by investors rather than the issuer at the close of trading was 50 million units. This means if the issuer needs 50 000 000/8 = 6.25 million units of DBS shares to hedge its position since the listing of this warrant.

Let’s assume due to the insufficient liquidity in the market, the issuer can only buy 6 million units of DBS shares to hedge its position at optimal price says at its average price of around S$18.80, computed based on the closing price of DBS since beginning of this year. This means the issuer has to pay an extra cost for the remaining 0.25 million units of DBS shares. If the issuer needs to pay the price of S$19.00 to buy those units for hedging, the bid/ask spread of the warrant will widen to (19.00 – 18.80)/0.02 * 0.02 * 90.22% / 8 = S$0.023 or about 5 ticks more.

The above are only assumptions made for the purpose of discussion and may not be necessary be true. Of course, sometimes an issuer may want to maintain a narrow spread for a particular warrant. So if the investors can spend a little time to observe how different issuers deal with the bid/ask spreads of their warrants, it would not be difficult to compare them and choose the most appropriate warrant to trade.

Investment Warrants

I came across this special type of warrant few months ago and I find it was quite an interesting derivative instrument that is very different from the usual plain vanilla warrant.

From what I know now is that the only issuer for Investment Warrant is Macquarie. I have gathered some information from their website and re-posted it here. If you are interested to know more, there is an upcoming free seminar on the 18th June 2008 talking about Investment Warrant. You can register here.

Macquarie’s Investment Warrants allow you to get exposure to shares at a fraction of the price. With Investment Warrants you can:

• gain long term exposure for a fraction of the share price
• limit your capital at risk
• increase your effective dividend yield

Investment Warrants have longer expiry dates, lower holding costs and a lower risk profile than Trading Warrants. They are suitable for both short term and long term investment horizons.

If you recall the first post on Analysis of Warrant Data I posted in early January this year, you will notice the warrant name has an additional “I” to indicate that it is an investment warrant, e.g. COSCOCORP MBL ICW90403. Also note that by its definition, there is only investment call warrant and no such thing as investment put warrant.

What is an Investment Warrant?

An Investment Warrant enables you to buy shares in two payments. You pay a fraction of the share price up front and get exposure to the capital movements in the underlying share and all of the ordinary dividends over the life of the warrant.

Generally, the price of an Investment Warrant will move in line with movements in the underlying share and, because warrants are only a fraction of the price of the underlying share, they tend to move in greater percentages than the share price.

Investment Warrants also give you a payment equivalent to 100% of the ordinary dividends of the underlying shares. This is something that normal derivative instruments do not offer. Hence, in a way Investment Warrants therefore allow you to potentially earn a greater return than you might achieve by owning the share itself (see example below).

Investment Warrants give you:

• the right to buy a share
• at a specific price (called the exercise price)
• on a specific date (called the expiry date)
• the equivalent of 100% of the ordinary dividends throughout the life of the warrant

Investment Warrants are listed on the SGX so you can buy and sell them at any time, just like shares.

At the expiry of the warrant you have the option to either pay the exercise price and take delivery of the shares or simply receive the cash settlement amount (if any).

Benefits of Investment Warrants

• Greater return potential – through the effect of gearing, price movements are magnified
• Longer term exposure – lower holding costs mean Investment Warrants are suitable for both short and long term investments
• No Margin calls - increase your exposure to shares without the risk of margin calls
• Physical settlement – option to exercise and take delivery of the fully paid shares at expiry
• Enhanced Dividend Yield – holders receive the equivalent of 100% of the ordinary dividends of the underlying share for less outlay

Warrants enable investors to spend less up front, diversify their investments, potentially accelerate their growth and meet their investment objectives sooner.

Who would use Investment Warrants?

You might use Investment Warrants if:

• you are a long-term investor looking for a lower risk way to increase your investment returns
• you are a trader with a positive view on an underlying share and you want a moderately geared alternative
• you are an existing shareholder and want to unlock some capital from your portfolio by switching from shares into Investment Warrants

How Investment Warrants work

If you believe DBS shares will rise, you may wish to leverage your view by buying Investment Warrants over DBS shares. A hypothetical example is shown below:

Instead of purchasing the DBS share at $21.00 you can buy the Investment Warrant for only $7.30 to gain exposure to the performance of the DBS shares. During the life of the DBS Investment Warrant, the warrant price will tend to move up and down in line with the DBS share price. Investors may increase or exit their investment at any time by buying or selling the Investment Warrants on the SGX. The investor will also receive the equivalent of 100% of the ordinary dividends paid by DBS throughout this term.

At the expiry, if the investor is still holding the warrant they may either pay the exercise price of $15 and take delivery of the DBS shares or they can choose to receive the cash settlement value (if any).

• The cash settlement at expiry is calculated using the following formula:
  (Share price - Exercise price) x conversion ratio
• For example, if DBS is at $24 at expiry the warrant value would be:
  ($24.00 - $15.00) x 1 = $9.00

How gearing can boost your return

One of the main advantages of warrants is ‘gearing’, meaning a warrant provides the holder with an increased exposure to the underlying share. Therefore, a small percentage change in the price of the share can lead to a large percentage change in the value of the equity warrant.

The added advantage of Macquarie’s Investment Warrants is the increased effective dividend yield. The holder of an Investment Warrant is entitled to a payment equivalent to 100% of the ordinary dividends in the underlying share; however as the warrant price is only a fraction of the share price the effective dividend yield to the holder is increased.

Here is a hypothetical example:

It’s important to remember leverage works in both directions, so a fall in the share price would also cause a greater percentage fall in the value of the warrant. It is also important to be aware that Investment Warrants will expire worthless if the share price is at or below the exercise price at expiry.

Using Investment Warrants to release capital from your portfolio

Investment warrants are a convenient and lower risk alternative to release capital from your portfolio. If you have an existing share holding you can switch into a Macquarie Investment Warrant by selling the shares and buying Warrants. By doing so you will maintain exposure to the share movements and dividends while releasing capital for other investments.

Here is a hypothetical example:

Advantages of Investment Warrants over other financing facilities

• Ability to leverage above 70%
• Limited downside
• No margin calls

There is always some risks in any kind of investment may it be stock, plain vanilla warrant or option etc. Hence the same goes for Investment Warrant. Please do some homework and understand the risks and rewards of this new derivative instrument better before risking your hard earned money in it.

The Time Is Now

It has been almost two months since I last posted my blog entry. I must apologize to my readers who may think I have gone missing and decided not to blog again. In fact, so many things have happened within my family in these two months so much so that I feel very depress and helpless at certain point in time. But I guess I need to be strong, for my family needs me more than ever now.

My mum was diagnosed with ovarian cancer and the doctor said it is most probably in stage 3c or 4. I read up a lot on ovarian cancer since the day my mum got admitted to the hospital and I knew stage 3c and 4 are the last two stages of ovarian cancer. The gynecologist doctor who saw my mum was actually a secondary school mate of mine and he did mention to me that the prognosis of ovarian cancer is not very optimistic. At that point of time, I really cannot hold back my emotions anymore and I cried. I knew for the very fact that crying would not help and I should not have cried especially in front of my mum. But I simply cannot control myself. I cleared all my FTOs during that period of time to accompany her in the hospital. I was in the hospital early in the morning and would not leave till late at night. I know my mum needs a lot of family support especially at this point in time.

Sometimes I really wonder what have my mum done wrong to deserve this. Her life as a child was not an easy one. Being the eldest daughter in the family, she got to help out at my grandfather stall at a very young age and she did not even have a chance to go school like her other siblings. As such, she does not even know how to write her own name. Yet, as a mum of us, she has given us unconditional love throughout our bringing up, taking care of us and ensuring we are always given the best and working long hours for some miserable paycheck just so as to lessen the burden of the family. Finally when my sister got married and had her first child this year, we advised her to retire so she can help to take care of my nephew. I was happy that she can finally relax and enjoy a little after all these years of hard work and can lead a better life at old age now. But then…why should she be stricken with this? I regretted very much not bringing her to do annual checkup. I hate myself for not noticing the first time she complained about her abdomen discomfort. I am really very angry with myself.

As the day passes by and I see her getting thinner and thinner and her hairs starting to drop because of the chemotherapy she is undergoing, my heart aches a lot. The very fact that I am so helpless seeing her suffering but not able to share with her the pain she is undergoing really make me very useless. The fact that she has to take a blood test every time she goes down to the hospital made my heart aches even more. The fact that she lost her sister few years back and her father the very next year made me realized one thing - this world has not in any way be kind or fair to her. Why must her life be so tough?

I once came across a poem when I first learnt to design my own webpage and I can appreciate that poem more than ever now. I would like to share that poem here with my readers. This poem titled “The time is now”. I hope my readers would forward it to anyone who they think might benefit them in one way or another. This poem was written by a mum to her son.

THE TIME IS NOW

If you are ever going to love me
Love me now while I can know
The sweet and tender feelings
Which from true affection flow

Love me now while I am living
Do not wait until I am gone
And then have it chiseled in marble
Sweet words on ice cold stone

If you have tender thoughts of me
Please tell me now
If you wait until I am sleeping
Never will be death between us
And I won't hear you then

So if you love me, even a little bit
Let me know while I am living
So that I can treasure it

Please feel free to bless anyone with this poem. I would like to take this opportunity to thank my friends, my colleagues and my readers that have given me a lot of support and encouragement during this very tough time of mine. Due to my mum condition, I have missed out some of the WAT gatherings and I have decided to take my CFA level II exam next year instead. Lastly, I will be back blogging and sharing things I learnt. Thanks everyone.