FAQs

·  The market maker for warrant XYZ is quoting at a very wide bid-ask spread, compared to other warrants of the same underlying.  Why is this so?

·  When the price of the underlying moves in my favour, the market maker for warrant XYZ widened the bid-ask spread.  Why is this so?

·  I hold call (put) warrant XYZ.  The underlying stock price had moved up (down) significantly but the warrant price hardly changed.  Why is this so?

·  When the underlying stock price goes down (up), call (put) warrant XYZ falls considerably.  However, when the underlying stock price is up (down) by a similar proportion, call (put) warrant XYZ rises just slightly.  Why is this so?

·  Market makers often cite changes in the implied volatility as a factor that affects pricing. How are the implied volatilities determined and why do they change? How may I be assured that the changes are fair and reasonable?

·  What are the obligations of a Designated Market Maker? Are there circumstances in which the DMM may not provide bid-offer quotes?

·  The market maker of warrant XYZ is quoting at a very wide bid-ask spread compared to other warrants of the same underlying. Why is this so?

Warrants that are deep in-the-money, deep out-of-the-money and/or short term may have a wider spread.  It is difficult for issuers to hedge their positions for these types of warrants as liquidity in the equity-linked notes and over-the-counter (OTC) options markets is often insufficient.  In order to manage their risk, issuers may not be able to market make with a narrow spread.

There may also be instances when an issuer has sold a large proportion of a particular warrant and thus maintains a larger spread to manage his risk.

·  When the price of the underlying moves in my favour, the market maker for warrant XYZ widened the bid-ask spread. Why is this so?

The fact that the warrant has moved in favour of or against an investor does not have a direct effect on spreads.

The bid-ask spread may also widen at certain times due to thin liquidity of the underlying or a sudden sharp rise in volatility of the underlying.  If the liquidity of the mother share is very thin, it might be harder for an issuer to hedge his position with the mother share.  Issuers may also widen their spread when the underlying experiences sharp price spikes after some period of quietness; however, as the underlying share stabilises, the spread should narrow.  For stocks that are typically volatile, the spread is usually quite consistent.

Widening of bid-ask spread could also be caused by factors listed in question 1 above.

·  I hold call (put) warrant XYZ. The underlying stock price had moved up (down) significantly but the warrant price hardly changed. Why is this so?

The warrant may be deep out of the money.  A call (put) warrant is in-the-money if the price of the underlying asset is higher (lower) than the exercise price of the warrant; a call (put) warrant is out-the-money if the price of the underlying asset is lower (higher) than the exercise price of the warrant.

Delta estimates how the warrant will move in line with the underlying.  Call (put) warrants have a delta ranging from 1 (-1) for deep in-the-money warrants to 0 for deep out-of-the-money warrants.  Deep out of the money warrants have a delta close to zero and such warrants will require bigger movements in the share price.

·  When the underlying stock price goes down (up), call (put) warrant XYZ falls considerably. However, when the underlying stock price goes is up (down) by a similar proportion, call (put) warrant XYZ rises just slightly. Why is this so?

One factor which affects warrant pricing is implied volatility, the level of which could change both inter and intra-day.  When the implied volatility level moves up, the warrant price will move up for both call and put warrants (and vice versa), and offset part of the change from the underlying price movements.

In addition, time decay may affect the value of the warrant from day to day.  Time value is the value attached to the time left to maturity.  As the warrant gets closer to maturity, time value decreases.  This is called “time value decay”.  The rate of time decay does not have a linear relationship with time: the closer a warrant is away from its maturity date, the faster its time value decreases.  As a result, when the mother share price goes up (down), the very short term call (put) warrants may go down if the share price movement is unable to compensate for the drop in time value.

·  Market makers often cite changes in the implied volatitily as a factor that affects pricing. How are the implied volatilities determined and why do they change? How may I be assured that the changes are fair and reasonable.

Implied volatility reflects the supply and demand conditions of a warrant. If demand for a particular warrant increases dramatically, the warrant price may be pushed up by the strong demand, hence the implied volatility increases. On the other hand, if a lot of warrant investors sell back the warrant at the same time, the selling pressure will drive the warrant price down, hence implied volatility decreases.

If there are no other participants in a warrant at a particular time, it is the market maker’s buy/sell quotes that will determine the value for the warrant and, hence, its implied volatility. For this reason, implied volatilities tend to fluctuate a lot more for active warrants. Warrants with lower traded volumes will tend to exhibit more stable implied volatilities.

Increased competition in warrants has encouraged issuers to be more competitive in pricing their warrants. Market makers use different products such as OTC options, Equity Linked Notes, other structured products or the mother share to hedge their warrants positions. When there is an adjustment to the OTC implied volatility, market makers often adjust the implied volatility of their warrants accordingly.

Although the implied volatilities quoted in the OTC market are not readily transparent or evident to retail investors, one can often take the mother share’s historical volatility as a reference to the change in implied volatility. However these will not always track closely as changes in implied volatilities can move independantly of a stocks historic volatility, reflecting the supply and demand for the warrants. The best reference point for investors to determine whether an implied volatility of a warrant is fair and reasonable is to compare to the implied volatilities of similar warrants over the same underlying stock.

Implied volatility can change all the time and often move intra-day. These movement often take place when sharp swings in the underlying or overall equity markets occur.

·  What are the obligations of a Designated Market Maker? Are there circumstances in which the DMM may not provide bid-offer quotes?

Under the listing requirements, warrant issuers who commit to make a market for the structured warrants they issued do not need to comply with the minimum placement and holder size requirement, and the minimum issue size requirement is reduced from S$5 million to S$2 million. The listing document will state whether the warrant issuer has committed to make a market in the structured warrants. By committing to make a market, the designated market-maker (DMM) appointed by the warrants issuer is obligated to provide competitive bid and offer prices for the structured warrants. This enhances liquidity in the warrants.

DMMs are available to make a market for their structured warrants during the normal trading hours. The maximum spread (the difference between a DMM's bid and offer quotes) and minimum lot size that DMMs are required to provide on the structured warrants are set out by the structured warrants issuers in the listing documents of the respective structured warrants.

There are circumstances in which DMMs will/may not be able to provide bid and offer prices. Some examples include:

1. during the pre-market opening and five minutes following the opening of SGX-ST on any trading day;
   
2. when trading in the underlying is suspended or limited in a material way for any reason;
   
3. when trading in the structured warrants is suspended or limited in a material way for any reason;
   
4. if each structured warrant is theoretically valueless (where the warrant issuer's bid price is below SGD0.005), the DMM will not provide a bid price; in such instance, the DMM will provide the offer price only;
   
5. where there are no structured warrants available for sale, the DMM will only provide a bid price;
   
6. when the stock market experiences exceptional price movements and volatility;
   
7. when the warrants issuer and/or DMM faces technical problems affecting the ability of the warrants issuer and/or DMM to provide bid and offer prices;
   
8. when the warrants issuer is unable to hedge its exposure or unwind an existing hedge.

The circumstances may vary for different warrants issuers and structured warrants. You are advised to read the listing document before investing.

Acknowledgement to contributing warrant issuers.

There may be other circumstances which are not addressed above.  Issuers have dedicated hotlines and websites which investors may contact for any queries.

While care has been taken to ensure the accuracy of the information in this document, SGX and its affiliates make no warranty as to the accuracy, completeness, merchantability or fitness for any purpose, of the information contained in this document or as to the results obtained by any person from the use of any information or investment product mentioned in this document. SGX reserves the right to make changes to such information from time to time. Any change, omission or error in such information, shall not form the basis for any claim, demand or cause of action against SGX or any of its affiliates and SGX and its affiliates expressly disclaim liability for the same.

Neither this document nor any information or opinion herein constitutes an offer, solicitation or invitation to make an offer to buy or sell any securities or any options, futures or other derivatives related to securities or any other financial instrument ("financial instruments"). SGX, its subsidiaries and their respective affiliates may deal in financial instruments in the usual course of their business, and may at any given time be on the opposite side of trades by investors and market participants.

This document is for general circulation and provides information of a general nature only. It does not have any regard to the specific investment objectives, financial situation or individual needs of any particular person receiving this document. Investors should seek advice from a professional financial adviser regarding investing in any financial instruments or adopting any investment strategies discussed in this document. The material in this document is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness assured. Examples are used for illustrative purposes only and do not constitute investment advice. Statements regarding future prospects may not be realised.

The value or price of, or income from, any financial instruments referred to in this document may fluctuate and may be affected by changes in exchange rates. Accordingly, investors may receive back an amount that is less than the amount originally invested, or may lose the entire principal amount invested. Past performance is not necessarily a guide to future performance. Any investments discussed herein may involve significant risk, may be illiquid and may not be suitable for all investors.