Warrant - calculating the value and formula

Calculate warant premium. 

Premium = ((Current Warrant price + Exercise price)/ mother share price - 1)*100%

e.g 1 - Hevea-WB

Closing price on 28/8/2015.

Hevea-WB = 0.695, Mother share (Hevea) = 0.94

Exercise price = 0.25, Expiration date = 1/3/2020

Premium = ((0.695+0.25)/0.94-1)*100% = 0.53%

Expiration date is > 1 year, premium = 10% is acceptable according to current KLSE quotation (practical approach).

Hence buying Hevea-WB at 0.695 is considered to be a good buy (0.53% premium). 

Hevea-WB should be 0.78 if it is trading at 10% premium. Any price < 0.78 is considered as a good buy.

e.g 2 - FBMKLCI-C4

Closing price on 28/8/2015.

FBMKLCI-C4 = 0.12, Mother share (FBMKLCI) = 1,613, Conversion ratio = 667:1

Exercise price = 1,700, Expiration date = 30/9/2016

We need to convert the price of warrant (FBMKLCI-C4) at 0.12 to Index point.

1.00 = 667 point ( conversion ratio)

The price of FBMKLCI-C4 is at 0.12, 

Hence FBMKLCI-C4 = 0.12*667 = 80 index point

Premium = ((80 + 1,700)/1,613-1)*100% = 10.4%

Expiration date is = 13 months, premium at 10.4% is acceptable according to current KLSE quotation (practical approach).

Hence buying FBMKLCI-C4 at 0.12 is considered to be acceptable (10.4% premium). 

Premium/month = 10.4%/13 = 0.8%.

Note

• If expiration date is < 1 year, premium paid should be < 10%. Please take note.
• I do not like to buy warrant if expiry date is < 3 months. It is my rule.

I hope all clients can make full use of this example to improve your knowledge and skill. You must practise a few times in order to be good.

Thank you.