Ping An Securities Derivatives Department
Since the resumption of warrant trading in China in 2005, the warrant market has developed rapidly, and more and more investors have participated in warrant trading. However, for many investors, warrants are still a strange product, and many investors lack correct understanding of the attributes of warrants. Some investors believe that warrants are purely a speculative tool. They either keep a distance or follow the trend of speculation. In fact, warrant, as a financial derivative instrument, is valuable in itself. In this issue, we will talk about the value composition of warrants.
The value of warrants includes two parts: intrinsic value and time value. The intrinsic value of the warrant is equal to the difference between the normal share price and the exercise price, that is, the income that can be obtained from the immediate exercise of the warrant. For the subscription certificate, the intrinsic value is equal to the amount of the positive share price higher than the exercise price. If the positive share price is equal to or lower than the exercise price, the intrinsic value is zero. On the contrary, the intrinsic value of a put warrant is equal to the part where the exercise price is higher than the normal stock price. If the normal stock price is higher than or equal to the exercise price, the intrinsic value is zero.
For the warrant, the warrant with a positive share price higher than the exercise price is an in price warrant, and the warrant with a positive share price lower than the exercise price is an out of price warrant; For put warrants, the warrants whose positive share price is lower than the exercise price are in the money warrants, and the warrants whose positive share price is higher than the exercise price are out of the money warrants. Therefore, the intrinsic value of in price warrants is greater than zero, while the intrinsic value of out of price warrants is zero.
Some investors may have questions: Since the intrinsic value of the out of price warrants is zero, is there no investment value? This is not necessarily, because in addition to the intrinsic value, warrants also have time value. Let's take a look at what is the time value of warrants.
For the warrant holder, if the warrant has not expired, even if the warrant is in an out of price state shares There is also the possibility that the price may change in favor of the warrant holder, so the warrant will have the opportunity to become in the price when it expires. Take the subscription certificate as an example. If the current stock price is 20 yuan and the exercise price is 25 yuan, and there is still half a year before the expiration, the warrant is out of the price at present, and the internal value is zero. If the stock price rises to 30 yuan half a year later, the internal value of the warrant will be 5 yuan at that time.
Therefore, we can understand that time value is the value generated because the price of the positive shares may change in favor of the holders during the remaining duration of the warrants. In general, the greater the volatility of the underlying stock, the greater the time value of the warrant; The longer the remaining term of the warrant, the greater the time value. As the expiration date approaches, the opportunity for the price of the shares to change in favor of the holders will decrease, and the time value of the warrants will also decrease accordingly. When the warrants expire, there is only intrinsic value but no time value. Therefore, we often remind investors not to participate in the speculation of the deep outer price doomsday round. The reason is that the time value of warrants is almost zero at this time, and the internal value is also zero, so participation in such warrants is extremely risky.
For more warrant information, please visit Ping An Securities warrant website www.pa18.com/warrants
