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