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What exactly are warrants

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

Warrants are a "right" but not a liability. It gives the holder the right to purchase or sell "relevant assets" (e.g. shares, indices, commodities, currencies, etc.) at a predetermined "exercise price" at a predetermined "maturity date".

There are two types of warrants in the market, commonly known as equity warrants and derivative warrants.

Equity warrants: The company's fund-raising activities are carried out through the issuance of the company's share subscription certificate. At the time of exercise, the Company will issue new shares and sell them at the exercise price to the holders of the share equity warrants.

Derivative warrants: Generally issued by investment banks. Issuers issue derivative warrants not to raise capital, but to provide investors with an effective tool to manage their portfolios. A derivative warrant is a listed security that is traded on an exchange and constitutes a contract between the issuer and the holder. The issuer's responsibilities and the terms and conditions of the warrant are detailed in the listing documents.

In terms of the rights of the holder, warrants are divided into call warrants and put warrants.

Call warrants: give the holder a right, but not a liability, to purchase the relevant assets for a specific period of time at an exercise price.

Put warrants: give the holder a right, but not a liability, to sell the relevant assets for a specific period of time at an exercise price.

In terms of exercise status, warrants are also divided into European Style Warrantand American Style Warrant.

American Style Warrant: holders may exercise their rights at any time from the date of listing to maturity of the warrant.

European Style Warrant: holders may exercise their rights only on the date of maturity. European style warrantsare the most common type of warrants in Hong Kong, We will introduce European style warrants here.

However, whether the warrants are European Styleor American Style, investors can sell their warrants in the market before maturity. In fact, only a small number of warrant holders will choose to exercise the warrant, and most investors will issue the warrant before it expires.

Here are three examples of buying a property.


1. The basic concept of the exercise of power

Suppose the reader has a real-time right to purchase a designated property for HK$1 million. The value of rights is most directly determined by the price of the property. If the current price of the property is HK$1 million, then the right is basically worthless, because whether or not there is such a right will not bring "preferential". Assuming a property price of HK$1.2 million, the value of the right would be HK$200,000, since the holder of the right could purchase a property worth HK$1.2 million. If this right is sold on the market, the best cost would be HK$200,000.

2. The effect of the length of the term on the exercise of value

Assuming the current property price is HK$1 million, the reader has two different rights, one is to exercise his right to purchase the property in real time for HK$1 million, and the other is to exercise his right to purchase the property a year later and the same to purchase the property for HK$1 million.

The right to sell these two rights in the market and to exercise them in real time is still not worth it, because whether or not there is such a right will not bring "preferential treatment". However, a year later, the exercise of the right has a "time value", as there will be some expectations in the market, a year later the price of the property is higher than HK$1 million, others are willing to buy this right. When the market value of the property is above HK$1 million, they can sell this right at a higher price to others who expect the property price to continue to rise.

The right to a one-year term would be worth more than the right to a six-month period. Similarly, the right to a six-month period would be worth more than the right to a three-month period. Because of the longer the duration, the greater the opportunity for delegates to exercise this right.

3. The effect of asset price amplitudes on the value of the exercise of rights

Suppose that two properties have the same price of HK$1 million. One property is in the heartland and prices have been rising and falling, while the other is in a remote suburb where prices have never risen or fallen in the past 10 years.

Assuming that the reader has two more rights, he may, after one year, purchase the central area property or the remote rural property for $1 million respectively. Which would be worth more if the two rights were sold on the market? Of course it's the right to be connected to a property in the heart of the city. Since the prices of properties in remote rural areas have not risen or fallen in the past 10 years, even if we wait another year, it is not expected that the property prices will deviate from the spot price of HK$1 million. Even if someone buys this right, they will not be willing to pay much value because the opportunity to exercise it is limited. On the contrary, although the price of property in the central area has risen or fallen, it will be worth it as long as there is an opportunity to exercise it.

What do the above three examples illustrate on the warrant? Warrants give the holder the right to purchase or sell the relevant assets at a specific exercise price on a specified date. The price of warrants is most basically affected by the relevant asset price, the maturity time and the relevant asset price amplitude.

Warrants "magnify changes in positive share prices". But in essence, a warrant is a "right" and its value ultimately depends on "how many opportunities there are for that right to be exercised". When it's clear, we can analyze how we can make a profit by buying and selling this right.

This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors.  It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Moomoo makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose of the above content.