Ping An Securities Derivatives Department
The theoretical value of warrants depends on such factors as the positive share price, residual maturity, exercise price, positive share price volatility, risk-free interest rate, etc. In actual transactions, the market price of warrants is also affected by the relationship between market supply and demand, and fluctuates around the theoretical value: when market supply exceeds demand, the market price is usually lower than the theoretical value; on the contrary, when supply exceeds demand, the market price is usually higher than the theoretical value. The more unbalanced the relationship between market supply and demand, the greater the deviation between the two will be. In this issue, we will discuss the impact of the circulation of warrants and the exercise mode of warrants on the price of warrants based on the relationship between supply and demand.
First, the circulation volume affects the market price of warrants by affecting the relationship between supply and demand in the market. Market funds usually have more demand for innovative products, absolute low price financial products, T+0 trading products, short selling mechanism products. Warrant products can just meet these demands, so they can attract a large number of funds. However, based on the data on April 23 this year, the number of the first issue of 16 warrants in circulation was 5.7 billion, which was only equivalent to the circulation of a large cap stock. The capacity was quite limited, and the supply and demand relationship was seriously unbalanced. Due to the existence of this unbalanced relationship, investors may blindly follow the trend of speculation caused by irrational factors in the market. Therefore, the market calls on the management to adjust accordingly to alleviate this pressure and the contradiction between supply and demand. Therefore, in view of the market maker mechanism of the mature covered warrant market, Shanghai Stock Exchange introduced the cancellation system of warrant creation, which eased the imbalance between supply and demand in the warrant market to a certain extent and improved the pricing efficiency of warrants.
Secondly, the warrant settlement method will also have a potential impact on the warrant price. Warrant settlement can be roughly divided into cash settlement and securities (physical) settlement. The settlement of securities (in kind) will have an impact on the underlying equity or the supply and demand relationship, thus affecting the market price of warrants. For example, during the exercise period last November, Masteel CWB1 was in a deep price with a small discount. Many investors for arbitrage purposes chose to sell the positive shares they obtained after the exercise. Such selling pressure may cause the price of the positive shares to fall, thus causing the price of the warrants to follow suit. Cash settlement means that when the warrant holder exercises, the issuer shall pay cash to the warrant holder according to the difference between the exercise price and the settlement price of the underlying securities and the exercise fee. Since the delivery of the underlying stock is not involved, cash settlement will not affect the price of the underlying stock and the price of the warrants. Generally, covered warrants are settled in cash. In the future, when covered warrants become the mainstream product in China's warrant market, cash settlement will also become the mainstream method.
In summary, the circulation volume and exercise mode of warrants may affect the market price of warrants. In view of the limited variety of warrants in the domestic market, the creation of a cancellation mechanism can effectively curb excessive speculation in warrants and ensure stable supply of warrants in the market. Physical settlement may have an impact on the price of regular shares, thus affecting the market price of warrants. Cash settlement will not have an impact on the price of regular shares. With the development of covered warrants market, cash settlement will be the mainstream way of warrants market in the future.
