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Warrant
 

Warrant is a type of securities which entitles its holder to buy or sell an underlying asset or indicator at a predetermined exercise price at a certain date or within a certain time interval. Shortly, warrant stands for a securitized option.

Warrants show reaction to movements of their underlying assets. They offer the opportunity of protection not only from rise, but also from fall of prices, and they generate income therefrom.

Warrants give a right to, but do not ever impose any obligation on, their investors. Therefore, maximum loss thereof is in any case limited by the amount paid by the investor for the warrant.

No margining or margin call, etc. is necessary for investors in trading warrants. Warrants may be traded just like the trading of share certificates.

Warrants have a “primary dealer / market maker” system. The issuer of warrants makes quotation entries on both purchase and sales systems as long as the market is open. This in turn entitles the investor to buy and sell them whenever he likes. Hence, no problem of finding buyer or seller thereinfor is encountered in any case.

Warrants are products subject to a predetermined expiration date, and they are amortized at that expiration date. That is why in calculation of the price of warrants, “time value” is also a very important factor. Even though price of the underlying asset remains fixed, value of the warrant falls down as the expiration date approaches.

Purposes of Use

Warrants are leveraged products that offers the opportunity to generate a high return against small investments. The investors may further use the warrant in order to insure and assure their portfolios through a small investment. This means to say that warrant is fit for both investors aiming a high rate of return by taking risk, and investors intending to protect themselves from risks.

Components of Warrant

Underlying Asset: Refers to the asset to which the warrant is linked. Such assets as foreign currency, gold, petroleum, indices, and stocks may serve as underlying assets of warrants.

Exercise Price: Refers to the price level at which the investor is entitled to buy or sell the warrant, depending on the type of warrant. Warrants having an exercise price close to spot price are expensive and less risky, while warrants having an exercise price far from spot price are cheap and with a higher level of risk.

Intrinsic Value: Refers to the difference between the price of the underlying asset and the exercise (strike) price, as corrected by the rate of conversion.

Time Value: Refers to the difference between current market value and intrinsic value of a warrant (as expressed by theta). At the beginning of maturity period, the effect of time value on the price of warrant is high, while towards the end of maturity, i.e. as the expiration date approaches, its time value reduces, and therefore, its intrinsic value comes to the forefront.

Type of Settlement: All warrants issued in Turkey are amortized and redeemed through cash settlement. Value of the warrant calculated at the expiration date is paid to the investor in cash.

Multiplier: Refers to the figure indicating how many underlying assets the holder of a warrant is entitled to buy or sell. This figure is determined at the beginning of maturity period and remains fixed until the expiration date (in the absence of a capital increase through rights or bonus issues).

Types of Warrants According to Direction:

Call Warrant: Refers to a type of warrant entitling the investor to buy the underlying asset at the expiration date. It is convenient for investors expecting a rise in the price of a chosen underlying asset. While other variables are fixed, as long as the value of underlying asset increases, the value of call warrant also rises parallel thereto.

Put Warrant: Refers to a type of warrant entitling the investor to sell the underlying asset at the expiration date. It is convenient for investors expecting a fall in the price of a chosen underlying asset. While other variables are fixed, as long as the value of underlying asset decreases, the value of put warrant rises parallel thereto.

Situation at the Expiration Date:

Call Warrants: If the settlement price of the underlying asset at the expiration date is equal to or below the exercise price of the warrant, then the warrant expires worthless. 

Spot Price of Underlying Asset at the Expiration Date < Exercise Price of Call Warrant → Worthless

If the settlement price of the underlying asset at the expiration date is above the exercise price of the warrant, then the price of warrant at the expiration date is calculated as shown hereinbelow:

Spot Price of Underlying Asset at the Expiration Date > Exercise Price of Call Warrant → (Settlement Price of Underlying Asset at the Expiration Date - Exercise Price of Warrant) x Multiplier

Put Warrants: If the settlement price of the underlying asset at the expiration date is equal to or above the exercise price of the warrant, then the warrant expires worthless.

Spot Price of Underlying Asset at the Expiration Date > Exercise Price of Put Warrant → Worthless

If the settlement price of the underlying asset at the expiration date is below the exercise price of the warrant, then the price of warrant at the expiration date is calculated as shown hereinbelow:

Spot Price of Underlying Asset at the Expiration Date < Exercise Price of Put Warrant → (Exercise Price of Warrant - Settlement Price of Underlying Asset at the Expiration Date) x Multiplier

Spot Price of Underlying Asset: It is the basic factor affecting the price of warrant. The more distant the exercise price of warrant is to its spot price, the cheaper the warrant is, and the closer the exercise price of warrant is to its spot price, the higher the price of warrant is.

Volatility: It is a standard risk measurement in respect of the underlying asset. As the volatility increases, so will the risk of the underlying asset, and therefore, the price of warrant will be at a higher level.

Interest Level: For call warrants issued, the issuer allocates a fund for purchase of underlying asset. Increasing interest rate will be reflected onto the price of warrant as an increase. Similarly, if the interest rates rise, the value of put warrant falls down.

Exercise (Strike) Price: In call warrants, the lower the exercise price is, the higher the value of warrant is, while in put warrants, the higher the exercise price is, the higher the value of warrant is.

Number of Days to Maturity: The more the number of days to end of maturity is, the higher the value of warrant will be. This is because the potential duration of performance of the warrant is longer in this case. This means to say that its probability of having a higher value will be more than that of a warrant with a lower number of days to maturity.

Dividend: Stock-based warrant holders are not entitled to collect any dividend over their stocks. In addition, the issuer prices the warrant by taking into consideration the probable dividend to be paid over the underlying stocks. Conditions of warrants shall be adjusted by sending the required notifications during the maturity for the sake of avoidance of any loss that may be incurred by the investors thereof.

Differences between warrants and option

  • Warrants and options that are more than similar in terms of definition and characteristics are often confused. However, there are indeed some distinctive differences between these two derivative instruments.
  • Options are contracts, whereas warrants are securities.
  • Options are traded according to the principles of a futures market, whereas warrants are traded according to the principles of a spot (cash) market.
  • Unlike options for which margining and margin calls should be made, no margining is necessary for investors in case of trading of warrants. The issuer is entirely responsible for the product.
  • The features of options are determined by the equity exchanges where they are traded. Features of warrants, on the other hand, are set by the issuer.
  • Terms of warrants are more flexible than options.

Advantages

Leverage: Warrants enable the investors to invest a major part of their savings in other assets by making use of the high rate of leverage provided by them. It is more advantageous due to lack of any margin call in spite of leverage effect, and as trading of warrants is as easy as trading of stocks.

Utilization of Fall Movement as Well: Warrants offer opportunities not only for rising markets, but also for falling markets. Investors believing that the price of the targeted asset will fall may invest in put warrants thereof, and utilize and benefit from the fall movement expected therein. These warrants further provide a hedging opportunity for the investors wishing to safeguard themselves against fall in prices, while carrying and retaining the relevant underlying asset.

Unlimited Income: In warrants, rights associated thereto are owned by investor, while obligations are assumed by issuer. Potential loss of the right owner, i.e. investor is limited by the amount of premium paid by it, while its potential income is unlimited. (However, in put warrants, as the value of underlying asset may be minimum zero, its maximum return will be the value at the zero point of underlying asset.)

Low Commission: In warrant transactions, though the rate of commission is same with that of your stock market, it is too low due to the leverage effect.

Risks

Time Value: Warrants are generally issued with maturities of 1-2-3 months. Aside from the intrinsic value, time value of a warrant is also an important cost, and time value inside a warrant is reduced by every day passing. Warrant will lose value unless the rise or fall movement expected by the investor is actualized during the maturity.

Probability to Loss Full Investment Money: Due to containing a high leverage, warrants are risky products. Given that no margining or margin call is attached thereto, maximum loss is, however, limited by the money invested. Though being cognizant of the maximum risk from the very first day seems as an advantage for many investors, it is also possible to consider and assess the highest probable risk under the heading of “risks”.

Legal Documents of Warrants

Issuer Information Document:

Pursuant to a decision of the Board of Directors of Garanti BBVA taken on March 1st, 2018, and in reliance upon an authorization granted to the Head Offices, an application is filed to the Banking Regulation and Supervision Authority and the Capital Markets Board for issuance of a total of 5,000,000,000 “Garanti BBVA Investment Firm Warrants” with a total nominal value of 50,000,000 Turkish Lira (Fifty Million Turkish Lira), each with a par value of 1 Kurush.

Accordingly, please click for the “Issuer Information Document” approved by the Capital Markets Board in respect of “Garanti BBVA Investment Firm Warrants” to be issued by Garanti BBVA up to an amount of 50 million Turkish Lira within a period of 1 year.

Brief Summary:

Pursuant to a decision of the Board of Directors of Garanti BBVA taken on March 1st, 2018, and in reliance upon an authorization granted to the Head Offices, an application is filed to the Banking Regulation and Supervision Authority and the Capital Markets Board for issuance of a total of 5,000,000,000 “Garanti BBVA Investment Firm Warrants” with a total nominal value of 50,000,000 Turkish Lira (Fifty Million Turkish Lira), each with a par value of 1 Kurush.

Accordingly, please click for the “Brief Summary” approved by the Capital Markets Board in respect of “Garanti BBVA Investment Firm Warrants” to be issued by Garanti BBVA up to an amount of 50 million Turkish Lira within a period of 1 year.

Memorandum of Capital Market Instruments

Pursuant to a decision of the Board of Directors of Garanti BBVA taken on March 1st, 2018, and in reliance upon an authorization granted to the Head Offices, an application is filed to the Banking Regulation and Supervision Authority and the Capital Markets Board for issuance of a total of 5,000,000,000 “Garanti BBVA Investment Firm Warrants” with a total nominal value of 50,000,000 Turkish Lira (Fifty Million Turkish Lira), each with a par value of 1 Kurush.

Accordingly, please click for the “Memorandum of Capital Market Instruments” approved by the Capital Markets Board in respect of “Garanti BBVA Investment Firm Warrants” to be issued by Garanti BBVA up to an amount of 50 million Turkish Lira within a period of 1 year.