Posted by Chrollo > 2014-04-15 22:17 | Report Abuse

I saw many people asking about what is structured warrants in Karex and Dsonic. So i decided to write a small part to share with you guys on what is structured warrants.(Take Karex as example) 1) Structured warrants have 3 main components a)Price of mother share (Spot Price: as of today's closing Rm3.29) b)Exercise Price (Rm3.18) c)Premium (CA price: as of today's closing Rm0.185) Structured Warrants have few types but mainly European Style and American Style in Malaysia. In Karex, its European style meaning you only can exercise the contract upon maturity at April 2015. For an example, if you purchase Karex CA at price today Rm0.185, you are locking yourself to buy Karex mother share at the ratio of 4 warrants to 1 mother share with exercise price of Rm3.18 at April 2015. So the cost of Karex mother share is [(Rm0.185 x 4)+Rm3.18] = Rm.3.92 So you may ask yourself why do people wan to buy at Rm3.92 when the mother share is only Rm3.29 NOW?? This is because sometimes people may not have a lot of money at disposal. If they feel they have the appropriate amount of money only in April 2015, they can buy now and convert to mother share in April 2015. So you may ask yourself again, why dont people buy at April 2015? The problem is, what if the price shoot beyond what you can afford in April 2015? That is the reason why this is used as a tool to hedge and lock in your position. This will allow the buyer of the contract to lock in the price TODAY and buy this Karex mother share in the FUTURE. However, the downside of the contract is that if the the spot price in April 2015 is lower than the exercise price (aka out of the money), the buyer will suffer loss. But the lost is only limited to the price paid for CA(Rm0.185). This is an option therefore the buyer can choose not to exercise the CA. The cost will be the premium paid for CA(Rm0.185) only.