Warrants Summary of basic knowledge and investments Money Tips

Category: Money tips Release Date: 2006-11-23

August 22, Baosteel warrants in Shanghai Stock Exchange. Prior to participating in the warrant transactions, the majority of investors, it is necessary to understand the basics of warrants, and investment warrants should be noted that some of the issues.
In the mature Western-owned

The market, regulatory agencies warrants (warrant) and options (option) and other derivative financial products with stringent requirements. In China, the authorities concerned to make these products have not yet clearly defined. Therefore, currently on the market terms prevailing in the professional mix phenomenon. In view of the existence of such a situation, this paper focuses from the warrants / options, meaning the point of view, make a note to investors. No matter warrants / options, the name and the name of the foreign similar products, the difference, as long as investors understand the nature of their content, you can freely use them for their investment services.

Warrant is essentially a contract, its holder to purchase warrant listing of the C of E, we have a right to choose, he could choose at a future time, the exercise of warrants specified in the contract to a certain prices (that is exercisable at a price) to buy or sell the underlying assets to the warrant requirement. For Baosteel, the underlying asset is Baosteel's stock.

Classification of Warrants

According to different classification criteria, warrants can be divided into different types, mainly including the following categories:

Accordance with the implementation of the way, is divided into American and European warrants warrants. If the contract stipulates that warrants the exercise of the option can only be at a future point in time (such as a trading day), then this is called the European-style warrants warrants. If the contract stipulates that warrants the exercise of options at a future point in time (such as a trading day) in any one trading day before, then the warrant is called American-style warrants. As the warrants on the right to choose a contract, other conditions being equal, the choice of exercise of the right timing, the American Continental Warrants Warrants have more than the right to choose. So in theory the price of not less than American-style warrants under the same conditions, the price of European-style warrants. Baoshan Iron and Steel Group is a European-style warrants to be issued.

In accordance with the main issue, warrants into equity warrants and covered warrants two kinds. Equity warrants are narrowly warrants issued by the listed company. Covered warrants are part of a broad warrants is determined by a third party other than the listed companies (usually for securities firms, banks, etc.) issued, not to increase the shares of the company's share capital. Baoshan Iron and Steel Group warrants to be issued in the exercise of the option holder, will not the total equity shares of Baoshan Iron and Steel produces dilution effect, so it is covered warrants.

In accordance with the rights of the content, warrants into warrants and put warrants. If the warrants specified in the contract holders at a certain price to buy the underlying asset, then the warrant is called warrants. Baoshan Iron and Steel Group is the warrants to be issued. If the warrants specified in the contract holders to sell a certain underlying asset price, then the warrant is called put warrants.

In accordance with the underlying securities, individual stocks are divided into type, combined type, index type and so on. Baosteel Warrants the subject of Baoshan Iron & Steel. As the market develops, there will also be based on the index (as card 50, the Shanghai and Shenzhen 300 Index), combinations (such as ETF, LOF) and other types of warrants product.

Warrants pricing and determinants of

General practice is the value of the warrants is divided into two parts: the intrinsic value and time value.

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The intrinsic value of warrants is the underlying stock and the difference between the exercise price. In terms of the warrants, the intrinsic value is equal to the underlying stock price minus strike price. Put it on the warrant exercise price is equal to minus the intrinsic value of the underlying share price. Except in very special circumstances, warrants worth at least equal to its intrinsic value. With a positive intrinsic value of the warrants referred to as-money warrants. If the warrants, which means that the price of the underlying stock above the exercise price; while if the put warrants, then the underlying shares of stock below the strike price. If the underlying share price is equal to the exercise price, that is called price level warrants. When the underlying stock price below the exercise price, that is called out of the money warrants. In both cases, the intrinsic value is equal to zero.

The pricing of options and warrants used by the basic principle of "no arbitrage" principle. That is, the value of warrants to exclude the use of any cash, a combination of the underlying shares and warrants to carry out risk-free arbitrage the value of the case. Black-Scholes formula can be used such as model calculations.

Warrant pricing more complicated, there are several factors that may determine the value of warrants, the following seven factors, is one of the most important, and most of the C of E models are taken into account these factors.

The underlying share price: the higher the underlying asset price, the higher the value of warrants. Anti-Israel no different. Therefore, as low-cost placements, issuance of such measures will reduce the underlying asset (such as stock), etc. the price, which will also reduce its corresponding warrant price. For put warrants, the situation is the opposite.

Exercisable at a price: the higher the exercise price, the lower the value of warrants ─ ─ reason is that the underlying asset's share price over the chances of an exercise price lower. But for holders of put warrants, the situation is the opposite.

Warrants expired from the time: In simple terms, warrants farther away from the due date, warrant holders of the greater choice, it warrants more valuable. Call and put warrants its role is the same.

Volatility of the underlying asset: volatility rate is the future of the underlying asset price volatility. Whether or warrant the value of put warrants are as volatility increases.

Warrant expiry date and the corresponding risk-free interest rate: through the purchase of warrants, warrant holders of the funds may be less likely to enjoy positive shares of the profits. Investors in the funds saved can be invested in risk-free financial instruments until the warrants expire on when to buy the underlying asset. This saved money can earn some interest. Therefore, the higher the interest rate, the higher the value of warrants. In other things being equal, the value of warrants may increase as interest rates rise. For holders of put warrants, the situation is the opposite.

Dividends: Dividends will lower the value of warrants. This is because holders of warrants, we can not obtain the underlying assets of the dividend. And in China, after the stock goes ex-dividend stock price fell because of ex-dividend effect, resulting in decline in the value warrants. But for those who put warrant holders, the situation is quite the opposite.

Dilutive effect: in the warrants, if accompanied by financing package, it will reduce the value of warrants. Baosteel scenario assumes the form of issuing warrants to placement of shares, then his value will be greatly reduced. Placements are more obvious dilution effect of

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