Non-collateralized Nature of Structured Products
Home / Macquarie Academy / Warrants Guidebook
Warrants Guidebook
Understanding the Warrant Structure
Please click on each of the tiles below for more details
-
Intrinsic Value & Time Value
A warrant's value consists of:
Intrinsic Value
When the strike of a call warrant is below the underlying's current share price, it is said to have 'intrinsic value'. Have a look at the example below. In this case the strike of $3.00 is at a $0.30 “discount” from the current share price, this is its intrinsic value. As such, this warrant will have a minimum price of $0.30 – its intrinsic value. All call warrants with an strike lower than the spot price should always be worth at least the intrinsic value.
Time value
A warrant will usually be worth more than its intrinsic value. As you can see in this example, the warrant is priced at $0.40, which is $0.10 more than its intrinsic value. This remaining value is called 'time value'.
-
Time Decay
The time value portion of a warrant's price will slowly reduce throughout the life of the warrant. This process is called 'time decay', or 'theta'. The theta of a warrant is not constant and will speed up as the warrant approaches its expiry. A general rule of thumb is that a warrant loses 1/3 of its time value in the first 2/3 of its life.
-
Moneyness
Moneyness refers to the relationship between the strike and the current share price.
The call warrant in the previous example has intrinsic value because the strike is below the current share price (reverse for puts). Warrants with intrinsic value are termed in-the-money (or ITM). When the strike is above the current share price for a call, it is termed out-of the money (or OTM) and when the strike and current share price are equal, it is termed at- the-money (or ATM).
Changing share prices means that the moneyness of a particular warrant can often change several times throughout its life, in-the-money warrants can thus quickly become at-the-money or out-of- the-money, or vice versa.
There is no particular moneyness that is favoured by all investors, each has their own advantages and disadvantages and are suited to different investors and/or different trades. The main characteristics are summarised in the below table.
