What is a Tranche Warrant?

A warrant is a call option issued by a company limited by shares to subscribe for its stock. It gives holders the right to purchase certain shares of the issuing company at a predetermined price within a certain period of time. For financing companies, issuing warrants is a special means of financing. The warrant itself contains option clauses. Before the holders subscribed for the shares, they did not own any creditor's rights or equity in the issuing company, but only had stock subscription rights. Nevertheless, the issuing company can raise cash by issuing warrants and can also be used as a form of compensation to the underwriters when the company is established. ^[1]

Warrants

A warrant is a call option issued by a company limited by shares to subscribe for its stock. It gives holders the right to purchase certain shares of the issuing company at a predetermined price within a certain period of time. For financing companies, issuing warrants is a special means of financing. The warrant itself contains option clauses. Before the holders subscribed for the shares, they did not own any creditor's rights or equity in the issuing company, but only had stock subscription rights. Nevertheless, the issuing company can raise cash by issuing warrants and can also be used as a form of compensation to the underwriters when the company is established. ^[1]

In terms of exercise, warrants are also divided into European and American warrants.

American warrants: holders can exercise their rights at any time between the listing date and the expiry date of the warrant.

European-style warrants: holders can only exercise their rights on the expiry date. European warrants are the most common type of warrants in Hong Kong.

However, regardless of whether the stock certificate is European or American, investors can sell and hold the stock certificate in the market before the expiration date. In fact, only a small number of holders of stock certificates will choose to exercise the stock certificates, and most investors will sell the stock certificates before expiration.

From the design of warrants, it includes 9 elements:

(1) Issuer

The issuer of equity warrants is the target listed company, and the issuer of derivative warrants is a third party other than the target company, which is generally a major shareholder or securities firm. In the latter case, the issuer often needs to deposit the underlying securities with an independent custodian as a guarantee of its performance of its obligations.

(2) Call and put warrants

When the holder of a warrant has the right to purchase the underlying securities from the issuer, the warrant is a call warrant. Conversely, when the holder of a warrant has the right to sell the underlying securities to the issuer, the warrant is a put warrant. Warrants generally refer to call warrants.

(3) Expiry date

The expiry date is the last date on which a warrant holder can exercise his right to subscribe (or sell). After this period, the holders of the warrants cannot exercise the relevant rights, and the value of the warrants becomes zero.

(4) Implementation method

Under the American execution method, the holder can exercise the subscription right at any time before the expiration date; while in the European execution mode, the holder can exercise the subscription right only on the expiration date.

(5) Delivery method

The delivery methods include physical delivery and cash delivery. Among them, physical delivery refers to the purchase of the underlying securities from the issuer when the investor exercises the right to subscribe, and cash delivery refers to the issuer to the investor Pay the difference between the market price and the strike price.

(6) Call price (strike price)

The warrant price is the price set by the issuer when issuing the warrants, and the licensee uses this price to subscribe the underlying stock from the issuer when exercising its rights.

(7) Warrant price

The price of a warrant consists of two parts: intrinsic value and time value. When the underlying stock price (the stock market price of the indicator) is higher than the subscription price, the intrinsic value is the difference between the two; and when the underlying stock price is below the subscription price, the intrinsic value is zero. However, if the warrant has not yet expired, the stock price of the underlying stock may still be higher than the warrant price, so the warrant still has market value, and this value is the time value.

(8) Subscription ratio

The subscription ratio is the number of shares that can be subscribed for each warrant. If the subscription ratio is 0.1, it means that each warrant can subscribe for ten shares.

(9) Leverage ratio

The leverage ratio is the ratio of the stock market price to the market price of the warrants required to purchase one stock, ie: leverage ratio = stock price / (warrant price x subscription ratio)

Leverage ratio can be used to measure the magnification of big and small. The higher the leverage ratio, the higher the investor's profit rate. Of course, the greater the risk of loss it can bear.

Warrants are usually either

It is worth pointing out that due to

Fundraising Features of Warrants:

(1) Warrants are a kind of financing promotion tool, which can promote the company to complete the stock issuance plan within the prescribed period and realize the financing smoothly.

(2) Helps improve the governance structure of listed companies. The use of warrants for financing, the realization of financing is realized in batches, and the interests of listed companies and their major shareholders are closely related to whether investors execute warrants before maturity. Therefore, during the validity period of the warrants, the listing Any behavior of the company's management and its major shareholders that harms the value of the company may reduce the stock price of the listed company, thereby reducing the possibility of investors executing warrants, which will harm the interests of the management of the listed company and its major shareholders. Therefore, warrants will effectively restrain the failed behavior of listed companies and encourage them to work harder to increase the market value of listed companies.

(3) The warrants as an incentive mechanism are conducive to promoting the equity incentive mechanism of listed companies. Warrants are a commonly used employee incentive tool. By giving managers and important employees certain warrants, the interests of managers and employees can be closely linked to the growth of corporate value, and a manager and employees can be promoted through the enhancement of corporate value. Then realize the benefit-driven mechanism of the appreciation of own wealth.

Warrants are

There are two types on the market

Suppose an investor buys 1 share of China Mobile (0941) with a code of 9769 at a price of 7 cents per share

In fact, only a small percentage of warrant holders will choose to exercise their warrants, and most investors will sell the warrants before they expire.

Whether it is

1. Complexity: What you do nt understand, no matter how attractive, you should not invest in it. Derivative warrants are much more complicated or difficult to understand than stocks or even traditional warrants.

2. Opposite price movement : A small change in the price of the underlying asset may not change at all, but it may cause a significant decline in the value of derivative warrants. Entering the market is very important, and if you get it wrong, the results can quickly become painful. "Warrants are by no means a tool to buy forgetting."

3. Warrant fee : The price paid for obtaining a warrant.

4. Limited life: cannot be held for a long time. Once it expires, it is worthless. For equity warrants, this life span may be 1 to 5 years, but for derivative warrants, it may be one year, or even six months, with a maximum of two years.

5. Time value diminishes the cost of warrants (or time value). The closer the warrant is to its last expiration date, the time value will disappear. In other words, if the relevant assets are still there, the value of the relevant warrants will decline, whether it is call warrants or put warrants. The sluggish market is not welcome. Because it will disappear the value of the warrant in the slow decline.

6. No dividend income: Warrants are not eligible to participate in the dividends of the issuing company of the relevant assets.

7. There is no shareholder right . The value of the warrant may be based on the stock of a company, but as the holder of a derivative warrant, he has no direct connection with the company. They have no rights enjoyed by shareholders. They have no voting rights, no annual or interim reports, and no option for shareholders to stay.

8. Online dedicated website is needed. The market for warrants is more important than the distribution of information, not the price. There may be up to 200 new warrants issued in Germany in a day.

9. Capital gains tax Compared with stocks, there is no stamp duty in the warrant market. This is an advantage; but it is a disadvantage to impose capital gains tax on both sides of the transaction. As securities, derivative warrants will be a source of tax revenue for the government as well as capital gains tax on stocks.

What exactly is a warrant?

Warrants are warrants in English, and are commonly known as "Warrants" in Hong Kong.

Warrants are a "right" but not a liability. It empowers holders to purchase or sell "relevant assets" (such as shares, indices, commodities, currencies, etc.) at a predetermined "expiry date" at a predetermined "strike price".

There are two types of warrants in the market, generally called equity warrants and derivative warrants.

Equity warrants: The company's fund-raising activities are carried out by issuing company share subscription warrants. Upon exercise, the company will issue new shares and sell them to holders of equity warrants at the exercise price.

Derivative warrants: generally issued by investment banks. The issue of derivative warrants by the issuer is not to raise funds, but to provide investors with an effective tool for managing the investment portfolio. Derivative warrants are listed securities that are traded on an exchange and constitute a contract between the issuer and the holder. The responsibilities of the issuer and the terms and conditions of the warrants are detailed in the listing document.

In terms of holders' rights, warrants are divided into call warrants and put warrants.

Subscription certificate: It gives the holder a right, but not a responsibility, to purchase the relevant assets within a specified period at the exercise price.

Put warrant: It gives the holder a right, but not a responsibility, to sell the relevant assets at a specific period of time at the exercise price.

In terms of exercise, warrants are also divided into European and American warrants.

American warrants: holders can exercise their rights at any time between the listing date and the expiry date of the warrant.

European-style warrants: holders can only exercise their rights on the expiry date. European warrants are the most common type of warrants in Hong Kong. We will mainly introduce European warrants here.

However, regardless of whether the stock certificate is European or American, investors can sell and hold the stock certificate in the market before the expiration date. In fact, only a small number of holders of stock certificates will choose to exercise the stock certificates, and most investors will sell the stock certificates before expiration.

Here are three examples of buying property.

(1) Basic concepts of exercise rights.

Assume that the reader has a real-time exercise right to purchase a designated property for HK $ 1 million. The value of the right is most directly determined by the price of the property. If the current property price is HK $ 1 million, the right is basically worthless, because whether or not owning this right will not bring "concessions". Assuming the property price is HK $ 1.2 million, the value of this right is HK $ 200,000, because the holder of the right can purchase a property valued at HK $ 1.2 million for HK $ 1 million. If this right is sold in the market, the best cost is HK $ 200,000.

(2) The impact of the duration on exercise value.

Assuming the current property price is HK $ 1 million, readers have two different rights. One is to exercise the right in real time to purchase the property for HK $ 1 million; the other is to exercise the right after one year, which can also be purchased for HK $ 1 million. Into the property.

Selling these two rights in the market, the right to exercise in real time is still worthless, because whether you own this right will not bring "concessions". But after one year, there is "time value" in exercising the right. Due to some expectations in the market, the price of the property will be higher than HK $ 1 million after one year. Others are willing to purchase this right. When the market price of a property is higher than HK $ 1 million, they can sell this right at a higher price to others who expect the property price to continue to rise.

Rights with a one-year term are worth more than rights with a half-year term. Similarly, rights with a half-year term are worth more than rights with a three-month term. Because the longer the period, the greater the opportunity for delegates to exercise this right.

(3) The impact of asset price volatility on the value of exercise rights.

Suppose two properties have the same price of HK $ 1 million. Among them, one property is located in the central area, the price has been rising and falling; the other is in the distant countryside, the price has not risen and fallen in the past 10 years.

Assume that the reader has two more rights in hand, one year later, they can purchase the central zone property or remote rural property for 1 million yuan. Selling these two rights in the market, which one is more valuable? Of course it is the right to be connected to the central property. Because the prices of distant rural properties have not changed in the past 10 years, even if they wait another year, the property prices are not expected to deviate from the spot price of HK $ 1 million. Even if someone buys this right, they will not be willing to pay too much value, because the right to exercise this right is limited. Conversely, although the prices of properties in central areas have risen and fallen, as long as there is an opportunity to exercise the right, this right will be valuable.

What do the three examples above show on the call warrants? The warrant gives the holder a right to buy or sell the relevant assets at a specified exercise price on a specified date. The price of a warrant is basically affected by the price of the relevant asset, the time to expiry, and the volatility of the price of the relevant asset.

Warrants "will amplify changes in stock prices." But in essence, a warrant is a "right" whose value ultimately depends on "how many opportunities this right has to be exercised". After positioning clearly, we can analyze how to profit by buying and selling this right.

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