Warrants | Türkiye İş Bankası A.Ş

Warrants are securitized options that grant the right to sell or buy either an underlying asset or an index at a pre-determined price, at the end of or up to a specific term, to the person in possession of the warrant. The exercise of this right can either be in the form of a cash settlement or through a recorded delivery to account. Warrants will initially be traded on the basis of the equities traded in BIST 30 index, baskets made up of these equities or the BIST 30 Index itself. A market maker is authorized by the Board of Directors of the Stock Exchange for each warrant to be traded under Collective Products Market in BIST Equities Market. The Market Maker ensures that the market operates honestly, smoothly and efficiently in the warrant/warrants he/she is responsible for and enters bid-offer quotations in the system on a continuous basis to be able to contribute to liquidity.

Features of Warrants

Besides providing the investors the means to achieve the same return with a much smaller budget than what the underlying asset requires, Warrants also provide the opportunity to make money when the markets are in a downturn. Warrants that can only be issued by intermediary firms are of two types; American and European. In European type warrants, the conversion of the warrant can only take place at the end of its term, while American type warrants does not require the instrument to reach its term for conversion. Although warrants grant the right to buy and sell the instrument to the investors, they nevertheless do not entitle to the following where share certificates are concerned;

Dividend rightsNew share purchase rights

Right to participate in liquidation balance

Right to participate in company management

Right to vote and obtain information.

Warrant Terminology

Maturity Date: Maturity date is the last date that the warrant can be exercised. In European type warrants, the conversion of the warrant can only take place at the end of its term, while American type warrants does not require the instrument to reach its term for conversion.

Warrant Conversion: Conversion involves the exercise of the right arising from the warrant. Conversion can be in cash or as posting to the accounts. The form of conversion is decided beforehand.

Conversion Rate: Indicates the number of warrants needed for 1 unit of underlying asset. To give an example; a warrant based on ISCTR with a conversion rate of 10:1 requires that 10 warrants are needed to acquire the right to purchase/sell 1 unit of ISCTR.

Breakeven Point: Indicates the point at which the investor starts making a profit upon exercising his/her right.

Call Warrant Price: 0,40 TL, Exercise Price: 5,60 TL, Conversion Rate: 1 Breakeven Point = Warrant’s Price/ Conversion Rate + Exercise Price = 0,40 + 5,60= 6,00 TL. When the Price of the Underlying Asset is 6,00 TL warrant reaches the breakeven point.

Index Multiplier: Indicates how much of the index price of one warrant will be processed proportionately in warrants with the index as the underlying asset.

Physical Delivery: Physical delivery of the underlying asset in return for the payment of the exercise price by the owner of the call warrant, and delivery of the underlying asset by the put warrant owner to the issuer in return for the exercise price.

Cash Settlement: At the time the right is exercised, instead of physical delivery of the underlying asset, cash payment of the difference between the exercise price of the right and the spot price of the underlying asset at maturity.

Intrinsic Value: The value of the warrant consists in general of the Intrinsic Value +time value. Intrinsic value indicates the current value of a warrant exercised at a specific time.

Intrinsic Value Call Warrant: (Price of the Underlying asset – Exercise Price) * Conversion Rate

Example:

(5,80 – 5,60)*1= 0,20 Intrinsic value of a Put Warrant: (Exercise Price - Price of the Underlying Asset) * Conversion Rate

Example:

(5,30 – 5,80)*1= 0 > Intrinsic Value cannot be smaller than 0.

Time Value: The difference between the price and intrinsic value of the warrant. Time value can be said to reflect the fluctuations in the value of the underlying asset until its maturity plus the cost of having a right to the said asset instead of investing in it outright.

Time Value: Warrant Price – Intrinsic Value

1st Session	09.30 - 12.30	Equities	Warrants
Opening Session	09.30 - 09.45	Order collection stage	Warrants are not included in the opening session.
Price Determination Stage	09.45 - 09.50	Opening price is determined, orders are matched	Quotations start to be entered for warrants. Market maker can enter quotations for the warrant he/she is responsible for until the end of the 2nd session.
Continuous Bidding	09.50 - 12.30	Continuous Bidding	Continuous Bidding (Purchase-Sale Transactions)

2nd Session	14.00 - 17.30	Equities	Warrants
Opening Session	14.00 - 14.15	Order collection stage	Warrants are not included in the opening session.
Price Determination Stage	14.15 - 14.20	Opening price is determined, orders are matched	Opening price is determined, orders are matched Quotations entered for warrants are valid until 5:30 pm.
Continuous Bidding	14.20 - 17.30	Continuous Bidding	Continuous Bidding (Purchase-Sale Transactions)

Different from equities, warrants traded at the Collective Products Market do not have an opening session. Within the framework of the market making principles, the orders of the market maker from 09:45:40 onwards and others after the quotation price is settled after the earliest 09:50 are relayed to BIST. The second session starts at 2:20 pm. The market maker can make quotation changes during the session.

* Orders are not accepted and trading does not start in a warrant until the market maker enters a quotation for the warrant he/she is responsible for.

Factors Affecting the Price of a Warrant

Spot Price of the Underlying Asset: The value of the call warrant increases in line with the price of the underlying asset while the value of the put warrant decreases in contrast.

Interest: The value of the call warrant increases in line with the increasing interest rates while the value of the put warrant decreases in contrast.

Days Remaining to Maturity: In warrants, the values of both the call and put warrants decrease as the time to maturity shortens.

Volatility: The higher the volatility of the underlying asset’s price the higher would be the values of both the call and put warrants. The reason for this is the fact that call and put warrants contain a right without any obligation regarding the concerned share.

Dividends: The investors in possession of a warrant cannot benefit from rights attached to the underlying equities such as capital increases, dividends, voting rights, etc. For this reason, if the dividends to be distributed are higher than expected, the price of the underlying asset will decrease leading to a decrease in the value of the call warrant and increase in the value of the put warrant.

Warrants provide the means for leverage to investors and as such it becomes possible to acquire a larger position at a lower cost.

Example:

An investor in possession of TL 1000 can purchase 200 units of an underlying asset at its current price of TL 5. If we assume that a call warrant written on this underlying asset has a price of TL 1 at a conversion rate of 1:1, then there is an opportunity to make the same investment by buying 200 call warrants at TL 200.

Warrants provide risk hedging opportunities to investors.

Example:

An investor in possession of 1000 ABCDE equity can protect his/her position against the risk of a decrease in the price of the equities by purchasing put warrants in an amount and at a level of protection desired instead of selling the said equities outright due to tax related issues, transaction costs or other reasons.

Warrants provide the means to protect their principals to investors while being able to benefit 100% from the return of the underlying asset.

Example:

An investor in possession of TL 1000 deciding to invest TL 950 in a 6-month deposit account at 5% will receive back approximately TL 1000 at the maturity of the deposit. As such he/she takes his/her principal under protection. With his/her remaining TL 50 he/she purchases 50 warrants based on ABCDE equity at a market price of TL 1 with exercise price of TL 5,60. The investor shall benefit at the rate of 100% from any price increase of ABCDE equities above TL 5,60 at maturity. As an example, if the price of ABCDE share is TL 7 at maturity he/she will gain TL 70 [50 x (7-5,6)]. At maturity the money in possession of the investor will be TL 1070. On the other hand at any price below TL 5,60 of ABCDE equities at maturity of the warrant shall render the same worthless, however, the principal of the investor will still be protected.

Warrants also provide the opportunity to make a profit on price decreases of the underlying security.

Example:

An investor in possession of TL 1000 is of the opinion that the price of ABCDE equities would decrease in a period of 6 months. In the spot market he/she is limited to waiting for the time when the price of the equity decreases to the predicted level to buy and moreover he/she will be required to wait for the price to rise up again to make a profit by selling the equities. This investor can buy 2000 put warrants on ABCDE equities for a maturity of 6 months trading at TL 0,50 for an exercise price of TL 4,50. He/she will make a profit if the price of the equity at maturity is less than TL 4,00. Let us assume that the price of ABCDE equities decreases to TL 3,80 from TL 5,00 at the end of the 6 month period. Under the circumstances the investor collects proceeds of 2000 x (4,50 – 3,80) = TL 1400 and makes a profit of TL 400.

Warrants provide a simultaneous profit opportunity for buyers of both call and put warrants in a market with fluctuating prices (taking a long position in volatility).

Example:

Call Warrant	Put Warrant
Exercise Price: TL 6.00	Exercise Price: TL 5.50
Maturity: 6 months	Maturity: 6 months
Conversion Rate: 1:1	Conversion Rate: 1:1
Price of the Underlying Asset: TL 5.00	Price of the Underlying Asset: TL 5.00
Call Warrant’s Price: TL 0.60	Put Warrant’s Price: TL 0.30

When there is uncertainty in the market and the price of the underlying asset fluctuates continuously, the prices of both the call and put warrants could increase. Even if the price of the underlying asset remains the same, in periods where the price volatility is high, the prices of both the call and put warrants can be higher than regular. Under such circumstances warrant owners, who invested in both sides can make a profit by selling their warrants.

Warrants provide the means for leverage to investors and as such it becomes possible to acquire a larger position at a lower cost.

Example:

An investor in possession of TL 1000 can purchase 200 units of an underlying asset at its current price of TL 5. If we assume that a call warrant written on this underlying asset has a price of TL 1 at a conversion rate of 1:1, then there is an opportunity to make the same investment by buying 200 call warrants at TL 200.

Warrants provide risk hedging opportunities to investors.

Example:

An investor in possession of 1000 ABCDE equity can protect his/her position against the risk of a decrease in the price of the equities by purchasing put warrants in an amount and at a level of protection desired instead of selling the said equities outright due to tax related issues, transaction costs or other reasons.

Warrants provide the means to protect their principals to investors while being able to benefit 100% from the return of the underlying asset.

Example:

An investor in possession of TL 1000 deciding to invest TL 950 in a 6-month deposit account at 5% will receive back approximately TL 1000 at the maturity of the deposit. As such he/she takes his/her principal under protection. With his/her remaining TL 50 he/she purchases 50 warrants based on ABCDE equity at a market price of TL 1 with exercise price of TL 5,60. The investor shall benefit at the rate of 100% from any price increase of ABCDE equities above TL 5,60 at maturity. As an example, if the price of ABCDE share is TL 7 at maturity he/she will gain TL 70 [50 x (7-5,6)]. At maturity the money in possession of the investor will be TL 1070. On the other hand at any price below TL 5,60 of ABCDE equities at maturity of the warrant shall render the same worthless, however, the principal of the investor will still be protected.

Warrants also provide the opportunity to make a profit on price decreases of the underlying security.

Example:

An investor in possession of TL 1000 is of the opinion that the price of ABCDE equities would decrease in a period of 6 months. In the spot market he/she is limited to waiting for the time when the price of the equity decreases to the predicted level to buy and moreover he/she will be required to wait for the price to rise up again to make a profit by selling the equities. This investor can buy 2000 put warrants on ABCDE equities for a maturity of 6 months trading at TL 0,50 for an exercise price of TL 4,50. He/she will make a profit if the price of the equity at maturity is less than TL 4,00. Let us assume that the price of ABCDE equities decreases to TL 3,80 from TL 5,00 at the end of the 6 month period. Under the circumstances the investor collects proceeds of 2000 x (4,50 – 3,80) = TL 1400 and makes a profit of TL 400.

Warrants provide a simultaneous profit opportunity for buyers of both call and put warrants in a market with fluctuating prices (taking a long position in volatility).

Example:

Call Warrant	Put Warrant
Exercise Price: TL 6.00	Exercise Price: TL 5.50
Maturity: 6 months	Maturity: 6 months
Conversion Rate: 1:1	Conversion Rate: 1:1
Price of the Underlying Asset: TL 5.00	Price of the Underlying Asset: TL 5.00
Call Warrant’s Price: TL 0.60	Put Warrant’s Price: TL 0.30

When there is uncertainty in the market and the price of the underlying asset fluctuates continuously, the prices of both the call and put warrants could increase. Even if the price of the underlying asset remains the same, in periods where the price volatility is high, the prices of both the call and put warrants can be higher than regular. Under such circumstances warrant owners, who invested in both sides can make a profit by selling their warrants.

In warrants, the right of purchase or sale of the underlying asset can be exercised at maturity, however it is also possible to trade the warrant itself within its term (exchange). If the warrant is either purchased or sold within its term, the exchange takes place on (T+2) transaction date as is the case with the trades made in the stock market.

At the maturity (if the warrant is American type then when desired) if either the purchase or sale right pertaining to the related warrant is to be exercised, then the process regarding the exercise of such rights can start at the earliest on the 3rd transaction date following maturity. Warrants are set off against the exchange and debt receivables resulting from the transactions in the share itself.

The following tables pertain to the taxation of gains made on warrants of intermediary firms traded at BIST within the scope of provisional clause 67 of Income Tax Law as per Law No. 6009 and the Decree of the Cabinet dated 27.09.2010 No. 2010/926 that took effect on 01.10.2010 in relation to the Law No. 6009:

Full Tax Payer

MARKET TYPE
Real Entities
Capital Firms*
Other Entities
Gains made on Intermediary Firm Warrants with underlying assets or equities as indicator and equity indices
0% Deduction
0% Deduction
0% Deduction
Gains made on the warrants of other intermediary firms
10% Deduction
0% Deduction
10% Deduction

* Including the mutual funds established according to the Capital markets Law No. 2499 as well as those that are determined to be similar to investment trusts by the Ministry of Finance and those subject to the regulation and auditing of the Capital Markets Board.

Limited Tax Payer

MARKET TYPE	Real Entities	Capital Firms**	Other Entities
Gains made on Intermediary Firm Warrants with underlying assets or equities as indicator and equity indices	0% Deduction	0% Deduction	0% Deduction
Gains made on the warrants of other intermediary firms	10% Deduction	0% Deduction	10% Deduction

** Including those subject to the regulation and auditing of the Capital Markets Board.

The arrangement regarding VAT obligations of warrant issuing firms and the VAT payers to trade in warrants has not yet been clarified. Therefore, it is recommended that VAT payers consult a tax advisor prior to trading in warrants.

Our bank is authorized to accept the buying-selling orders of our customers in warrants as an agency of our subsidiary Is Yatırım Menkul Degerler A.S. Our customers have been able to perform their trades in warrants through Internet Banking Branch since November 2010.

Order Submitting, Cancellation and Change

Our customers with an investment account opened at our Bank can enter orders in the system all through the day on every day of the week (except between 05:30-06:15 pm on trading days). Orders submitted outside the session hours are held in the system of our Bank and submitted in the first trading session.

Orders without a price limit cannot be entered for warrants (free priced orders). Customer determines on his/her own the price of the bid or ask order he/she enters. An order submitted at a price higher or lower than the price quotations would not be realized.

Free margin is applied in warrants. There are no base, ceiling, or floor price applications.

In warrants, different from equities, the orders submitted to BIST can be cancelled or price improvement /deterioration and also order split transactions can be realized on the orders.

Exchange and Conversion Processes

While the right to buy and sell the underlying assets to the investor granted by warrants may be used at maturity (conversion), the warrant may also be bought or sold until its maturity (exchange). When a warrant is bought or sold within its term, the exchange takes place in (T+2) trading day as is the case with the current application in the stock market.

In transactions performed at maturity, warrants in possession of a customer are automatically removed from the account of the customer on the second trading day following the maturity date and any cash or physical assets arising from the warrant rights are deposited to customer’s account at the earliest starting from the third trading day following the maturity date.

Please click Risk Information Form to read the pertaining to warrants.

As a result of trading warrants in capital markets, you may make a profit as well as a loss. For this reason, prior to deciding to trade it would be advisable for you to have an understanding of the risks you may face in the market and come to a decision by taking into account your financial situation and limitations.

To serve this purpose you are required to understand the issues indicated in the “Warrant Risk Notification Form” as prescribed in article 16 of communiqué on “Principles Pertaining to the Board Registration and Trading of Intermediary Firm Warrants “ Serial No: III No: 37 (“Communiqué”).

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