Ping An Securities Derivatives Department
Essentially, warrant is an option contract, which gives investors the right to buy or sell a certain number of positive shares at a predetermined price (exercise price) at an agreed time. In the transaction of warrants, investors need to pay a certain fee to the issuer or seller of warrants in order to obtain this right. The essence of this fee is the value of warrants.
Theoretically, the value of warrants can be divided into intrinsic value and time value. The intrinsic value is the income that investors can obtain by exercising their rights immediately. For the subscription certificate, if the price of the positive shares is higher than the exercise price, the intrinsic value is equal to the amount of the positive share price higher than the exercise price. For example, if the exercise price of a subscription certificate is 10 yuan, and the price of the regular shares is 12 yuan, the internal value is 2 yuan. If the positive share price is equal to or lower than the exercise price (parity or out of price warrants), the intrinsic value of the warrants is zero; For put warrants, the opposite is true.
Since the time of exercise is often agreed, investors generally cannot exercise right immediately, so the intrinsic value is not the only factor that determines the value of warrants, especially for parity warrants and out of price warrants. Although the intrinsic value of these two types of warrants is zero, they are always bought and sold at a price higher than zero before maturity. This is because there is also an important part in the price of warrants - the time value of warrants.
The time value of warrants is essentially the value that warrants have profit potential before maturity. For example, a subscription certificate is still half a year away from its expiration. Now the price of the regular shares is 10 yuan and the exercise price is 15 yuan, so the current intrinsic value of the warrants is obviously zero; However, if the positive share price rises to 20 yuan half a year later, the intrinsic value of the warrant will be 5 yuan at that time, and the holder of the warrant may still make a profit. Therefore, even if the intrinsic value of the warrant is zero at present, it will still trade at a price higher than zero, which is the reflection of its time value.
The intrinsic value of the warrant is only related to the price of the underlying stock and the exercise price, while the time value is also affected by many other factors, such as the residual maturity of the warrant, the volatility of the underlying stock, and so on.
Since the time value represents the possibility of the return of the warrant to the holder before its expiration, generally speaking, the longer the remaining period of the warrant, the greater its time value. As time goes by, the warrants are getting closer to the maturity date, and their time value will become smaller and smaller. Moreover, the more warrants tend to be out of price, the less residual maturity, and the faster time value will be lost.
In addition, the value of time is also related to the volatility of the stock price. Since investors who buy warrants obtain corresponding rights by paying premium, their potential gains may be unlimited, and their maximum losses are limited (only limited to the premium paid), the greater the volatility of the positive share price, the greater the time value, whether it is a call warrant or a put warrant.
