26 January 2012

Structured warrant turnover on banks and rigs jumps in January

• Daily average traded value of the structured warrants on DBS, OCBC, UOB, Keppel and Sembcorp Marine collectively jumped 70% to $2.7 million in the first three weeks of 2012 compared to December 2011.
  
• Structured warrants are products issued by a financial institution to enable investors to leverage on the upside and downside price movement of the underlying asset, which could be pan-Asian benchmarks including Hang Seng Index, Hang Seng China Enterprises Index, Straits Times Index or blue-chips such as DBS, Keppel and Genting. 
  
• There are currently more than 200 structured warrants listed on SGX.
  

All the above-mentioned counters are expected to announce their 2011 financial results as shown in the announcement schedule below.  

The chart below illustrates the price performances of the above-mentioned stocks compared to the Straits Times Index (STI) for the year to last Friday’s close. Aside from OCBC Bank, all the above-mentioned stocks have outperformed the STI.

Oil Supply and Demand News

In a report released by the Organization of the Petroleum Exporting Countries (OPEC) on 16 January 2012, world oil demand in 2012 is forecasted to grow by 1.1 million barrels per day to 88.9 million barrels per day. Separately, as highlighted by the International Energy Agency (IEA) on 18 January 2012, oil markets have faced supply issues, including a pending EU ban on Iranian oil imports and retaliatory threats from Tehran to close the Strait of Hormuz, through which flows roughly one-third of world oil exports.

Reported Singapore Bank activity

Total bank lending in Singapore rose 2.3% in November 2011 to $415.8 billion compared to $406.5 billion in October 2011, according to figures from the Monetary Authority of Singapore on 30 December 2011. Bank lending in November 2011 rose 31% compared to the year earlier. As reported in Channel News Asia, Singapore banks have seen strong loans growth in 2011, particularly in trade finance as European banks reduce their emerging markets exposure.

Structured warrants 101

Structured warrants are products issued by a financial institution to enable investors to leverage on the upside and downside price movement of the underlying asset, which could be pan-Asian benchmarks including Hang Seng Index, Hang Seng China Enterprises Index, Straits Times Index or blue-chips such as DBS, Keppel and Genting. Therefore, structured warrants enable investors to free up their capital while maintaining a similar level of exposure to the underlying asset or otherwise increase their exposure for the same investment outlay.

There are currently more than 200 structured warrants listed on the Singapore Exchange (SGX). Each warrant is defined by the following features:

• Underlying Asset: Investors can choose from a variety of local underlying such as Straits Times Index, DBS or Keppel as well as Hong Kong benchmarks or stocks including Hang Seng Index, China Construction Bank and Sands China.
• Call or put: Call warrants benefit from an upside price movement in the underlying asset and allows investors to take a bullish view of the underlying. Conversely, put warrants benefit from a price decline and are catered to bearish views.
• Exercise Price: This is the price at which the warrant-holder can buy (for call warrants) or sell (for put warrants) the underlying asset at expiry and determines the “moneyness” of the warrant. Call warrants are “in-the-money” when the underlying asset price is higher (lower) than the exercise price, “at-the-money” when the underlying asset price is equal to the exercise price and “out-of-the-money” when the underlying asset price is higher than the exercise price. The reverse applies for put warrants.
• Expiry Date: Warrants have a finite lifespan and cease to exist on expiry date. The longer the time-to-expiry of the warrant, the more time for the warrant to move in favour of the investor and the higher the “time value”.
• Conversion Ratio: Comparing two warrants with identical terms but different conversion ratio say 10 warrants per share and 5 warrants per share respectively, the latter will have an absolute price twice that of the former. The price of a warrant may in turn affect its minimum tick size (e.g. SGX securities <$0.20 have a tick size of $0.001 and securities >$0.20-$2 have a tick size of $0.005) and thus the required price movement of the underlying to trigger a one tick change in the warrant.
• Issuer: There may be warrants with similar terms issued by different issuers. Investors should consider the implied volatility of the warrant as well as the ability of the issuer to provide fair pricing and adequate liquidity.

Some key factors that influence the price of a warrant after it is listed are displayed in the table below.

*Other factors like dividend yield and interest rate may also affect the price of a warrant but to a much lesser extent.

• Underlying Asset Price: An upside movement in the underlying asset makes a call warrant more valuable and a put warrant less valuable.
• Implied volatility: This refers to the expected price fluctuation of the underlying asset going forward. The higher the implied volatility, the higher the price fluctuation of the underlying asset, the greater the potential for the warrant/ option to trade in-the-money and hence, the increase in both call and put warrant values. 
• Time to expiry: As a warrant trades towards expiry, it loses time value . This is known as “time decay”, an effect which accelerates particularly in the last one month to expiry. In other words, longer dated warrants have higher time value and decays at a slower rate than their shorter dated counterparts and may be suitable for more conservative investors. Time decay is usually considered as a cost of the gearing benefit of a warrant and may be offset by a rise in the underlying asset price.

Example: Call Warrants for Capital Efficiency

Investors usually use call warrants to take directional views on a particular stock without committing a significant capital. For example, the share price of Keppel was $9.30 at end December 2011 and one board lot is equivalent to a capital investment of $9,300.  On a year to date basis as of 20 January 2012, Keppel has appreciated 14% or $1,290 per board lot. An investor who is bullish on Keppel may consider buying some call warrants at a fraction of the initial capital to enjoy the same notional dollar returns. The following table illustrates that returns from two of the most actively traded warrants on Keppel over the same period exceeds 70%.

*Based on offer price at 30 Dec 5pm and bid price at 18 Jan 5pm

If Keppel had unexpectedly drop say 20% over the same period, the investor would have lost $1,860 in their shares investment. In contrast, the maximum loss of their warrant investment is the initial capital of about $1,700.

Seminars & Resources

Investors can learn more about structured warrants from industry experts through these complimentary seminars:

Specified Investment Products

As part of the Monetary Authority of Singapore’s (MAS) initiative to introduce stronger measures and enhance requirements to further safeguard the interests of individual investors, Structured Warrants have been categorised as Specified Investment Products (SIPs).

SGX SIPs have structures, features and risks that may be more complex in nature. The MAS now requires broking firms to ascertain whether an individual investor has the relevant knowledge and experience to understand the risks and features of SIPs before allowing the individual to open an account to trade SIPs listed on both securities and derivatives markets.

SGX has introduced two online initiatives, a Customer Account Review Module and an Online Education programme, to support individual investors in their understanding and trading of SIPs listed on SGX. Click here to access these initiatives.

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www.sgx.com/warrants

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