Understanding SGX warrants

I decided to write about warrants because I want to explore other options on the stock market. It's always good to read up more and how the financial markets works. On the contrary, warrants are extremely volatile and unsuitable for the average investor. There is a lack of information available on warrants investing in the SGX context, so I'm here to share what I've gathered so far.

Firstly, the Definition:

Warrants give the holder the right but not the obligation to buy an underlying security (either a stock or an index, e.g. STI index) at a predetermined price (known as the strike or exercise price), on or before a predetermined date (known as the expiry date).

However, most of the warrants traded on SGX are European style warrants, which means that the warrants can only be exercised on the expiry date, and not before.

And then there are two different kinds of warrants: a call warrant and a put warrant. 

• A call warrant represents a specific amount of shares that can be purchased from the issuer at a specific price at the expiry date, and they tend to move in the same direction as the underlying security. 
• A put warrant represents a specific amount of equity that can be sold back to the issuer at a specific price at the expiry date, and they tend to move in the opposite direction of the underlying security.

Some of of the Common Terms associated with warrants:

• The Strike or Exercise Price is the amount that must be paid in order to either buy the call warrant or sell the put warrant. The payment of the strike price results in a transfer of the specified amount of the underlying security.
• The Conversion Ratio is the number of warrants needed to buy or sell one of the underlying security. For example, if the conversion ratio is 0.5, this means that the holder needs two warrants to buy or sell one of the underlying security. Except in the case of an index warrant, an index multiplier is used instead (which I will show the calculation later).
• The Premium is the difference paid between the exercise price of the warrant and the current market price of the underlying security. Hence typically, the premium will decrease as the price of the warrant rises, and / or the time to the expiry date decreases.
• The Gearing or Simple Gearing is calculated by dividing the original share price by the original warrant price: e.g. $1.50 / $0.50 = 3. The 3 is the gearing factor, and the larger the gearing factor, the greater the potential gains (or losses).

Layman Explanation:
Warrants are actually a substitute for shares, except that they allow you to buy a certain amount of shares for less capital. The fact that you can trade warrants for a fraction of the price of the underlying security and yet gain the same exposure (the same amount of gain or loss) to the security, makes warrants behave like super charged shares.


As such, if you invest $1,000 in a warrant, your money could potentially either (1) double, or (2) decline to zero, within a month. It could even happen in just one day or even over a few hours. If you were holding a stock instead, that kind of price action would probably take years.

Warrants in the SGX context:
In SGX, the majority of the warrants traded are called structured warrants, or covered warrants. Whereas normal warrants are issued by the companies themselves and gives the holder the right to buy or sell the underlying stock upon the expiry date, structured warrants are not issued by companies. 


Instead, they are issued by the financial institutions, and upon the expiry date, the holder does not get to buy or sell the stock. Instead, if the warrant is in-the-money (ITM) at the expiry date when the current price of the underlying security is higher than the exercise price, then the warrant will have some value. But if the warrant is out-of-the-money (OTM) or at-the-money (ATM) at the expiry date when the current price of the underlying security is lower or equal to the exercise price, then the warrant will have no value, i.e. it becomes worthless.

How to Read a Warrant Name:
Index Warrant: STI2850SGAeCW70329
STI - the STI index is the underlying security
2850 - the exercise price
SGA - the name of the issuer (financial institution)
e - european style warrant
CW - call warrant
70329 - expiry date in year, month, day format. In this case, 29th March, 2007.

Warrant Settlement:
Using the STI 2850 call warrant as an example, if the STI ends at 3000 on the expiry date (29th Mar 07) and the conversion ratio is 0.003, then the warrant is in-the-money, and the settlement is as follows: (3000 - 2850) x 0.003 = $0.45.
Hence, the warrant has a value of $0.45 per warrant.


Accordingly, if the STI ends at 2850 or below that, then the warrant has no value.


I hope that helps to explain how warrants work somewhat, especially on the SGX. I used these following websites for reference, and you can visit them to get further detailed information on warrants.


Investopedia definition here.
Sg warrants website here.