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□ Li Songci
The English name of warrant is warrant, commonly known as "warrant" (transliteration) in Hong Kong.
Warrants are a "right" but not a liability. It gives the holder the right to purchase or sell "relevant assets" (such as shares, indexes, commodities, currencies, etc.) at the predetermined "exercise price" on the predetermined "maturity date".
There are two types of share warrants in the market, generally called equity warrants and derivative warrants.
Share warrant: the company's fund-raising activities are carried out through the issuance of share warrants. Upon exercise, the Company will issue new shares and sell them to the holders of share capital warrants at the exercise price.
Derivative warrants: generally issued by investment banks. The issuer's issuance of derivative warrants is not to raise funds, but to provide investors with an effective tool for portfolio management. Derivative warrants are listed securities that are traded on exchanges and constitute a contract between the issuer and the holder. The responsibilities of the issuer and the terms and conditions of the warrants are detailed in the listing documents.
In terms of the rights of the holders, share warrants are divided into subscription warrants and put warrants.
Subscription certificate: gives the holder a right, but not a responsibility, to purchase relevant assets at the exercise price within a specific period of time.
Put warrant: give the holder a right, but not a responsibility, to sell relevant assets at the exercise price within a specific period of time.
In terms of exercise status, warrants are also divided into European and American warrants.
American stock warrant: The holder can exercise his rights at any time between the listing date and the expiration date of the stock warrant.
European warrant: the holder can only exercise its rights on the expiration date. European warrants are the most common type of stock certificates in Hong Kong. We will mainly introduce European warrants here.
However, whether the stock certificate is European style or American style, investors can sell the stock certificate in the market before the expiration date. In fact, only a small number of share certificate holders will choose to exercise their share certificates, and most investors will sell their share certificates before the expiration.
Here are three examples of purchasing properties.
（1） The basic concept of exercise right.
Suppose the reader has a real-time right to purchase a designated property for HK $1 million. The right value is most directly determined by the property price. If the current price of the property is 1 million Hong Kong dollars, then the right is basically worthless, because whether the right is owned or not will not bring "concessions". Assuming the property price is HK $1.2 million, the value of this right is HK $200000, because the person holding the right can purchase a property worth HK $1.2 million with HK $1 million. If this right is sold in the market, the best cost will be 200000 Hong Kong dollars.
（2） The impact of the length of years on the exercise value.
Assuming that the current property price is HK $1 million, the reader has two different rights. One is to exercise the right in real time and purchase the property at HK $1 million; The other is that the right can be exercised one year later, and the property can also be purchased for HK $1 million.
If these two rights are sold in the market, the right to exercise them in real time is still worthless, because whether you have this right or not will not bring "preferential" benefits. However, one year later, the exercise of the right has "time value", because there will be some expectations in the market that the property price will be higher than HK $1 million one year later, and other people are willing to purchase the right. When the market price of the property is higher than HK $1 million, they can sell the right at a higher price to other people who expect the property price to continue to rise.
The right of one year is worth more than the right of only half a year. Similarly, the rights of half a year are worth more than those of only three months. Because the longer the time limit, the greater the opportunity to exercise this right.
（3） The impact of asset price volatility on the value of exercise rights.
It is assumed that the price of two properties is HK $1 million. Among them, one property is in the central area, and the price has been rising and falling; The other is located in a remote rural area, and the price has never risen or fallen in the past 10 years.
Assuming that the reader has two more rights, he can purchase the property in the central area or the property in the remote countryside for 1 million yuan one year later. If these two rights are sold in the market, which is more valuable? Of course, it is the right connected with the property in the central area. Because the price of property in remote rural areas has not risen or fallen in the past 10 years, it is expected that the property price will not deviate from the spot price of HK $1 million even if it waits another year. Even if someone buys this right, they will not be willing to pay too much value, because the opportunity to exercise this right is limited. On the contrary, although the price of the property in the central area has risen and fallen, as long as there is an opportunity to exercise the right, the right will be valuable.
What do the above three examples show on the redemption of share warrants? The warrant gives the holder the right to buy or sell the relevant assets at a specified exercise price on a specified date. The price of warrants is basically affected by the price of related assets, the time to maturity and the volatility of related asset prices.
The warrant "will magnify the change of the stock price". But in essence, the warrant is a "right" whose value ultimately depends on "how many opportunities this right has to be exercised". After the positioning is clear, we can analyze how to make profits by buying and selling this right.
(The writer is the Managing Director of Societe Generale Securities (Hong Kong))
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