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| Questions about warrants or covered warrants? Ask warrants expert Andrew McHattie by e-mail by clicking HERE. Please note that we will not give individual advice. All questions and answers will then be posted in the space below on this page. Your anonymity will be respected, so please feel free to ask whatever questions you wish. Would you please give me the addresses of companies in London who offer covered warrants on European and American equities? Writing in February 2005, there are five issuing banks. All have very good websites, and it is a good idea to visit these - they carry details of all of the warrants in issue, together with a range of other information and tools. The websites are as follows: Dresdner Kleinwort Wasserstein: http://www.warrants.dresdner.com Are there any warrants on Japan? Yes, there is a good range of call and put warrants available on the Nikkei 225 Index, and Dresdner Klerinwort Wasserstein have also issued some warrants on individual Japanese stocks. You can deal in these warrants, in sterling, on the London Stock Exchange. Is there a source available to obtain broker upgrades/downgrades on stocks as they happen? By the time I currently receive the news of a brokers recommendation, the stock has already moved. This information is certainly very useful when examining individual stock warrants. Usually you will need to be a client for a stockbroker to send their research. Other news sources may pick up on upgrades and downgrades, but as you rightly say, this will be later. I do not know of any website which will allow you to receive this information more effectively. Is there any rule against dealing in covered warrants in a SIPP? No. You can deal in covered warrants in a SIPP. This is a very useful facility for many investors. How do the covered warrants issuers make money? Do they usually trade or hedge against the warrant positions with options or forward contracts, or do they have to own the shares for the covered position at the time of issuance? It does vary, but many issuers will cover their positions in the options markets, or by using other derivatives. The exposure is effectively ‘repackaged’ in a securitised format for the covered warrants. There is a profit margin built in to the pricing, and the issuers also make money on the dealing spread. That said, there is no absolute requirement for the issuers’ exposure to be covered, and in some cases it will not be. Frequently, for example, the issuer will issue both call and put warrants, and sales of these will to some degree cancel each other out. On other occasions it is possible that some stock might be bought in the market prior to the issue, or it may be ‘borrowed’ to cover a warrant issue. The process by which a warrant becomes ‘covered’ is opaque, but what really matters to warrant investors is (i) whether the pricing of the warrant is attractive; and (ii) whether the issuer has adequate financial resources. Assuming these two requirements are met, it does not matter to a great degree how the issuer structures its own assets. Why are warrants so much more expensive than options? This is an interesting point, and one which does need to be addressed. Our studies show that some warrants are indeed highly priced against options, whereas others are not. One of the four issuers is not very competitive at present. One definite point to make is that dealing spreads are much, much tighter in the warrants market, and so for active traders the higher premiums might be worth paying. In general terms, it seems sensible to compare options and warrants prices. There is some scope for warrant pricing to improve. There are only four competing issuers in the UK at present, compared with 20-30 in the developed markets of Europe. More competition would (and hopefully will) iron out any high valuations. Can you compare covered warrants against options? There are plenty of similarities between the two. Warrants are essentially option-style instruments, although they are securities rather than contracts. Warrants score with their tight dealing spreads, reasonable dealing charges, ease of accessibility (you can use your existing stockbroking account and check the London Stock Exchange prices easily), choice, and length of maturity. Instead of a three, six, or nine month period with options, warrants typically last for 12-18 months, and can be longer. Options score because you can ‘write’ them, effectively on the other side of the contract from the buyer, and this application can be used in sophisticated trading strategies. You cannot write covered warrants. Will the London Stock Exchange make a lot of money from the introduction of covered warrants? Perhaps this question is better directed to the LSE itself, but the short answer is that it hopes to. The LSE is a commercial organisation which will hope to run the new market segment profitably. If covered warrants prove popular then this will be good for the exchange, which broadly benefits from more issuance and more trading. Certainly the LSE sees covered warrants as a good way to recapture market share from both LIFFE options and spread-betting. Where can we find a program which does Black-Scholes calculations? Preferably it should be downloadable and free. You can find a number of on-line calculators on the web. One of the better ones is at http://www.blobek.com/black-scholes.html. The McHattie Group has a calculator which is being developed and which may be made available to investors. What are the chances of being able to 'short' covered warrants? You cannot. Covered warrants are designed so that with a 'long' position - ie be buying the warrants - you can adopt a bullish or a bearish position on an underlying stock or index. If you are bearish, you can buy put warrants. What protection will covered warrant investors have (for example, in the unlikely event of the issuing bank going into receivership)? In addition to taking on the usual risks associated with buying warrants,
covered warrant investors are also adopting some credit risk. The issuer
is effectively the counterparty to your trades, and you are reliant on
the issuer being able to honour the appropriate cash value of the warrants.
For this reason there are stringent requirements before a bank is allowed
to issue warrants, and they must also publish their latest financial information
in the listing particulars. There is some degree of caveat emptor (buyer
beware) however. If an issuer were to go into receivership, there is a
possibility that the value of the warrants might not be paid. Your money
is not protected absolutely. We do not know of any cases in any overseas
covered warrants market where this problem has arisen, but it is a good
idea to be aware of this extra risk, even if it is small. If you have
any doubts about the financial strength of an issuer, do not buy their
warrants. |
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Warning: you should not buy shares
or warrants with money you cannot afford to lose. This web site is intended
for UK investors. Options and other derivatives, warrants, and margined
transactions. This warning notice draws your attention to some of the
high risks associated with warrants. The risks attaching to instruments
and transactions of this kind are usually different from, and can be much
greater than, those attached to securities such as shares, loan stock
and bonds, such transactions often having the characteristics of speculation
as opposed to investment. Warrants may involve a high degree of 'gearing'
or 'leverage'. This means that a small movement in the price of the underlying
asset may have a disproportionately dramatic effect on your investment.
A relatively small adverse movement in the price of the underlying asset
can result in the loss of the whole of your original investment. Moreover,
because of the limited life of warrants, they may expire worthless. A
warrant is a right to subscribe for shares, debentures, loan stock or
government securities, usually exercisable against the original issuer
of the securities. Because of the high degree of gearing which they may
involve, the prices of warrants can be volatile. Accordingly, you should
not buy warrants with money you cannot afford to lose. You run an extra
risk of losing money when you buy shares in certain smaller companies
including ‘penny shares’. There is a big difference between
the buying price and the selling price of these shares. If you have to
sell them immediately, you may get back much less than you paid for them.
The price may change quickly, it may go down as well as up, and you may
not get back the full amount invested. It may be difficult to sell or
realise the investment. Because of the volatile nature of the investment,
a fall in its value could result in your recovering nothing at all. Changes
in rates of exchange may have an adverse effect on the value or price
of the investment in sterling terms. As with other investments, transactions
in warrants, shares, and investment trusts may also have tax consequences
and on these you should consult your tax adviser. We have taken all reasonable
care to ensure that all statements of fact and opinion contained on this
site are fair and accurate in all material respects. Investors should
seek appropriate professional advice if any points are unclear. This site
is intended to give general advice only, and the investments mentioned
are not necessarily suitable for any individual. It is possible that the
McHattie Warrants Alert Fund or officers of the McHattie Group may have
a beneficial holding in any of the securities mentioned. Published by
The McHattie Group, Clifton Heights, Triangle West, Bristol, BS8 1EJ.
© 2002-2005. Tel: 0117 925 8882. Fax: 0117 925 4441. E-mail: mchattie@tipsheets.co.uk.
All rights reserved. No part of this site may be reproduced, stored in
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Authority. |
Securitised Derivatives:
these instruments may give you a time-limited right to acquire or sell
one or more types of instrument which is normally exercisable against
someone other than the issuer of that investment. Or they may give you
rights under a contract for differences which allow for speculation on
fluctuations in the value of the property of any description or an index,
such as the FTSE 100 Index. In both cases, the investment or property
may be referred to as the “underlying instrument.” These instruments often involve a high degree of gearing or leverage, so that a relatively small movement in the price of the underlying investment results in a much larger movement, favourable or unfavourable, in the price of the instrument. The price of these instruments can therefore be volatile. These instruments have a limited life, and may (unless there is some form of guaranteed return to the amount you are investing in the product) expire worthless if the underlying instrument does not perform as expected. You should only buy this product if you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges. You should consider carefully whether or not this product is suitable for you in light of your circumstances and financial position, and if in any doubt please seek professional advice. |