Continued from Part 1 here
There is one point, I am still not clear.
Genting covered warrant J2UW, is a call warrant.
Strike price is $1.15 and the expiry date is 02/04/2012.
On the expiry date, would the J2UW warrant holder need to pay up S$1.15 if there is no entitlement to the Genting share?
What does the Strike Price mean in this case? Is there a PUT covered warrant for Genting?
Recent closing price of Genting was S$1.22.
If upon expiry, Genting price is S$1.30, how much profit would be for holder of 100,000 units J2UW?
Dear reader: To answer your query, first we have to be clear what is a warrant.
A warrant gives the holder the right, but not the obligation, to buy (via a 'call' warrant) or to sell (via a 'put' warrant) an underlying asset at a pre determined price (the 'strike' price or 'exercise' price) by a contracted date. The price paid for this right is the 'premium' and with warrants you cannot lose more than 100% of this initial premium paid.
For Genting covered warrant J2UW, this means the holder of this warrant has the right, but not the obligation, to exercise the right to buy the underlying Genting shares at $1.15.
With regard to your question on profit, GentingSMBLeCW120402 (J2UW) if exercised at maturity, there is no profit. The devil is in the conversion ratio and cost of warrant. I have provided an example below for illustration:
GentingSMBLeCW120402 (J2UW) illustration purpose only
Strike price: $1.15.
Purchase price of warrant: $0.11
Conversion ratio: 1 share(s) : 4 warrant(s)
Genting price at expiration: $1.30
We have to calculate the breakeven point of the call warrant : i.e. the share price at expiration that must be exceeded for the investor to make a profit.
Breakeven point for call warrant = purchase price of call warrant * conversion ratio + strike price of Genting. In the above example, breakeven point = 0.11 * 4 + 1.15 = $1.59
This means, at expiration, Genting shares have to trade above $1.59 before you can make money (exc transaction costs)
There is no put warrant for Genting Covered warrant
FYI, the financial institutions such as Deutsche Bank etc host educational seminars on warrants. You may wish to sign up for a free seminar with them.
Ernest Lim is an assistant treasury and investment manager. Prior to joining his present employer in 2009, he was with Legacy Capital Group Pte Ltd, a boutique asset management and private equity firm, as an investment manager since 2006. He received a Bachelor of Accountancy (Honours) from Nanyang Technological University in 2005. He is a Chartered Financial Analyst as well as a Certified Public Accountant Singapore.
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