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
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.
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:
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.
Some points that may seem advantageous, where investing in warrants is concerned, can also prove to be sources of risk. The leveraging that is the primary advantage of a warrant may help the investor make large profits while on the other hand leaving the investor with the risk of a substantial or total loss of his/her investment. Example: Let us assume that the investor instead of buying 200 ABCDE equities at a price of TL 5 with his TL 1000 prefers to buy 1000 European type 6 month maturity call warrants at a price of TL 1,00 for an exercise price of 5,60 at a conversion rate of 1:1. If we further assume that the market price of the equity at maturity is TL 5,50, the warrant will not be used and TL 1000 investment will be entirely lost. Under the circumstances, a loss at the rate of 100% is realized at the maturity. If the investor instead had purchased 200 equities at a price of TL 5 he/she would have made a profit of TL 100 = 200x(5,50 – 5) at maturity.
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
* 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
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
Exchange and Conversion Processes