What happens when warrants expire?
AS a warrant approaches expiry, some of the most common questions our investors ask are:
What happens to my warrant when it expires? Will I lose my investment amount?
In this week’s column, we look to answer these questions, and to explain the formula used to calculate the cash settlement amount (CSA), that is, if there is any.
Briefly, should the warrant expire with value, the investor will receive the cash settlement amount via a cheque.
As all structured warrants in Malaysia are currently cash-settled, there will be no underlying shares exchanged for warrants. Warrants which expire without any value will not require the holder to top up any differences.
How do I calculate the CSA for AIRASIA-C33? Consider the example of AIRASIA-C33 – a call warrant expiring on Oct 28, 2016, which has an exercise ratio of 2.5 warrants to one share, and an exercise price of RM2.10. The settlement price will be the average closing price of the underlying share for the five market days prior to the expiry date. For this case, the closing prices used will be: Oct 21, 2016: RM2.80 Oct 24, 2016: RM2.82 Oct 25, 2016: RM2.82 Oct 26, 2016: RM2.80 Oct 27, 2016: RM2.78
Based on these five closing prices, the average closing price will be calculated as RM2.8040. Using the CSA formula below, investors can determine the CSA of AIRASIA-C33 to be RM0.2816 per warrant.
CSA = (Settlement Price – Exercise Price) / Exercise Ratio = (RM2.8040 – RM2.10) / 2.5 = RM0.2816 per warrant
Suppose an investor has 100,000 units of AIRASIA-C33 on expiry, the total CSA the investor can expect to receive is RM28,160 which is calculated as 100,000 x RM0.2816. A cheque will be issued by Macquarie to the registered address of the holder within seven working days after the expiry date. Warrants that expire out-of-the-money On the flipside, should the settlement price of AIRASIA-C33 be below the warrant’s exercise price of RM2.10, this warrant will be deemed out-of-themoney (OTM) and will expire worthless. However, in such cases, investors will not be required to make any margin top-ups. The maximum exposure to the investor is set up front at the start of the trade, which is the investment capital.
To find out more, please refer to https://www.malaysiawarrants.com. my/eduhtml?p=eduhtml, or contact us at 03-2059 8840.
To view the full list of structured warrants available on Bursa Malaysia, kindly visit malaysiawarrants.com.my
Provided for Malaysian residents’ information only. It is not an offer or recommendation to trade and is not research material. Past performance is not indicative of future performance. You should make your own assessment and seek professional advice.