Category: Money tips Release Date: 2005-12-23
This column Investor Education Center, hosted by the SSE
Q: How simple and reasonable valuation of warrants?
A: With regard to the pricing of warrants, we do not intend to adopt BS model (a kind of option pricing model), because the BS model for most investors lack the expertise may be obscure. Therefore, in order to make the majority of investors will understand that we intend to adopt simple and clear, easy to grasp the vast number of investors means to determine the initial warrant price is reasonable.
A warrant pricing is reasonable, of course, to see what can be achieved when the warrant expires gains. For presentation convenience, with the symbol ST warrants expiration date, said the price of the underlying stock, X said the warrants exercisable at a price. We know that the warrants of the future earnings for the Max (ST - X, 0), put warrants future earnings for Max (X - ST, 0), of which, Max () to the maximum value function. Can be seen that warrants future earnings depends primarily on the future price of the underlying stock.
Obviously, if the price of warrants closer to the present value of future benefits warrants, the warrant is reasonably priced; if the price of warrants is less than the present value of future benefits warrants, then the warrant is underestimated. To determine whether the warrant is reasonable pricing, depending on the stock to determine the accuracy of future prices.
Q: Can the current price from the warrants warrants to push down the price of the underlying stock at maturity it?
A: Of course, we can also go down from the price of warrants warrants pushed the price of the underlying stock at maturity. To illustrate this method, we Baosteel Warrants November 30, 2005 price of the deal as an example to illustrate this. Baosteel Warrants November 30, 2005 closing price of 1.659 yuan, that is, August 30, 2006 the price of Baosteel's stock must be at least 6.159 (4.5 +1.659) yuan is feasible, and this, which also without regard to interest costs, it might be possible in theory, but in fact the right line on the original shares of Baosteel difficult to achieve this price. We know that, for European-style warrants, warrants expiration date the underlying stock price higher, then the greater the intrinsic value of warrants, the upper limit for the day's stock prices, Baosteel warrants in November 2005 of 30 price ceiling of 3.92 million (2005 years, November 30 closing stock price of Baosteel); for the European-style put warrants, the warrants expiration date, the lower the price of the underlying stock, then the greater the intrinsic value of warrants, the exercise price limit for the present value of the continuous compounding. In theory, the right line on the underlying stock or greater, then the greater the value of warrants; the greater the decline in the underlying stock, then the greater the value of put warrants.
Q: How do rational investors to invest in companies such as Baoshan Iron and Steel warrants it?
A: We can try by Baosteel's stock market performance to roughly estimate Baosteel shares August 30, 2006 price range, according to the random walk model of stock prices can be drawn: In 95% of the possibilities, in 2006 8 Baosteel stock 30 is most likely to value was 3.91 yuan, the price range of [1.81,6.01]. In other words, the probability of 95%, the maturity of Baosteel stock is likely to achieve its expectations for 3.91 yuan, this time on Baosteel warrants worthless! Even if the stock reached its highest price Baosteel 6.01 yuan, November 30, 2005 the price of Baosteel warrants the value of a maximum of only 1.51 (6.01 - 4.5) million.
From the above simple analysis we can see that the price of Baosteel's warrants were seriously over-estimated. Warrants for the Wuhan Iron and Steel and Wuhan Iron and Steel pricing of put warrants, investors can also predict the stock prices of its simple approach to valuation, I believe that can draw a similar conclusion. No wonder the people for warrants trading has been dubbed the "Fool", however, have the last laugh was the sweetest smile, the real income earned from the sale of warrants who must belong to those time "just stupid" people!
In short, due to warrants trading is a new thing in China, China's stock market has always been "chasing the new" habits, together with its T +0 trading mechanism, exacerbated by speculation in the breeze. Warrants, however, trading is a zero-sum game, someone will make some losses, which the winds of speculation investors will ultimately hurt themselves and the already fragile capital markets. Therefore, in order from unnecessary losses, investors need to establish a correct warrants investment philosophy, so that warrants transaction back to a rational, healthy development track.
