Non-collateralized Nature of Structured Products
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Warrants Guidebook
How are Warrants priced?
The value of a Warrant is determined by six variables.
Please click on each of the tiles below for more details
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Share Price
The underlying share price (or index) is one of the most important determinants of the warrant price. As the share price increases, the value of the call warrant will increase and the put warrant price will fall (the same works in reverse). To see how the share price affects the warrant price please refer to the below example.
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Strike
Also commonly known as Strike Price, this is the fixed price at which investors are entitled to buy the underlying share on the expiry date for call warrants (or sell, in the case of put warrants). As such, the higher this price, the less likely the call warrant will be exercised and hence, the less value ascribed to the warrant. Conversely, in the case of a put warrant, the higher the price at which you are able to sell the asset on a future date, the more likely the put warrant is to be exercised and hence, a higher value ascribed to that warrant.
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Expiry Date
The future date at which the warrant will cease to exist is known as the expiry date. For both calls and puts, the longer a warrant has time remaining until expiry, the higher the value of the warrants. This is because, the longer a warrant has remaining until expiry, the higher the probability of it expiring with value.
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Volatility
Volatility can be defined as "a measure of uncertainty about the future performance of a stock". The higher the uncertainty, the more volatile the share price will be. Higher volatility leads to a higher price for the warrant, for both calls and puts. Implied volatility may be affected by the demand and supply for the warrant. A high demand can lead to higher implied volatility levels of the warrant and hence a higher price and vice versa.
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Dividends
Although warrant holders do not receive dividends, they will not be disadvantaged in this respect as forecast dividends are already priced into the warrant. As such, call warrants will not fall in price if the underlying shares fall by the dividend amount on the ex-div date. Similarly, put warrants will not increase in price in such a scenario.
If however, there is a change in the forecast dividend announced on the stock, where the actual dividend comes in higher than the amount forecasted in the warrant, this can lead to a drop in the price of a call warrant and an increase in the put. Corporate actions (such as special dividends, capital repayments, share splits and rights issues) are treated separately and adjustments will be made to the warrant terms.
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Interest Rates
Interest rates will affect the price of a warrant through financial holding costs. Typically, when you buy a call warrant, issuers will hedge their position by buying the underlying share. This requires funding and, as such, when the cost of borrowing goes up as a result of rising interest rates, the price of a call warrant will also go up. The inverse is true for a put warrant.
Helpful Tips
When choosing an appropriate warrant, investors should be more concerned with the first four factors. Generally, the last two factors – dividends and interest rates – have a smaller impact on the warrant price.
To estimate how each of the above factors can affect a warrant's price, you may use the Macquarie's warrant calculator, click here
