For greater explanation see the Data Input/Output Definitions.
We include three examples on this page:
- UKP warrant with standard terms
- US$ warrant with conversion ratio of 4
- Japanese warrant priced in Deutsche Marks
Note: In all the examples that follow we assume that todays date is 1 November 1995.
1. UKP warrant with standard terms
Assumption: The warrant exercise price is UKP1.12, and it expires 5 May1998. The warrant is trading at 30p, and the share price is UKP1.20. The conversion ratio is 1 (i.e. each warrant confers the right to buy one share).
All the terms are standard with this warrant so we can input the values directly to the calculator, as follows:
|Share Price: ||1.20 ||Exercise Price: ||1.12
|Warrant Price: ||0.30 ||Maturity: ||2.5
Note: The warrant price of 30p was input to the calculator as "0.30", to keep the units consistent. (Alternatively, all the prices could have been input in pence).
The above inputs give the following output:
|Time Value:||0.22||Premium(%): ||18.3 ||CFP(%): ||9.1
|Intrinsic Value:||0.08||Gearing: ||4.0 ||PPI(%): ||43.3
- The warrant is "in-the-money" (the share price is above the exercise price); this is quantified by the intrinsic value of 0.08. If the warrant was exercised (by paying UKP1.12 to buy a share) and then the resulting share was immediately sold into the market at the prevailing rate (UKP1.20) a profit of UKP0.08 would be made.
- The difference between the total warrant price 0.30 and the intrinsic value is the time value = 0.22. This is the extra premium investors are willing to pay for the potential for further share price increases in the future - until expiry of the warrant.
- The premium of 18.3% describes the share price increase required to enable the investor to exercise the warrant and sell the resulting shares and recover the cost of initial warrant purchase and exercise. In this case, the price of the warrant is 0.30, and the exercise price is 1.12. The combined cost of warrant purchase and exercise is 1.42 (which is an 18.3% increase from the share price of 1.20).
Note: In the case of in-the-money warrants, the premium can be regarded as just the time value expressed as a percentage of the share price.
- The gearing of 4.0, roughly represents the geared performance of the warrant compared to that of the share. A gearing value of 4.0 suggests that if the share price rises 30% then the warrant would increase 120%.
Note: In practice, this is unlikely to happen exactly. However, the gearing value does give a quick idea of the scale of geared performance to be expected.
- The Capital Fulcrum Point (CFP) of 9.1% indicates that if the share price was to experience an annual growth of more than 9.1% then, by expiry of the warrant, the warrant performance would be greater than that of the share. Annual growth of less than 9.1%, would result in the share out-performing the warrant.
Note: These comparative growth rates can be seen easily in the Share Price Growth Matrix.
- The PPI figure of 43.3% suggests that if the share price rises 43.3%, then the warrant price will double (at least).
[ top ]
2. US$ warrant with conversion ratio of 4
Assumption: The warrant exercise price is 88.5c, and it expires 3 July 1997. The warrant is trading at $2.50, and share at $1.45. The conversion ratio is 4 (i.e. each warrant confers the right to buy four shares).
This is similar to the example above, with the main difference being that the conversion ratio is 4.0. All inputs to the calculator must be on a per share basis. So, although the warrant price is $2.50, this actually covers four shares. Therefore we adjust this warrant price, to take account of this. By dividing the warrant price by four, we get an adjusted warrant price, that reflects the price of the warrant per share. Hence, this gives us an adjusted warrant price of $0.625.
The inputs to the calculator are:
|Share Price: ||1.45 ||Exercise Price: ||0.885
|Warrant Price: ||0.625 ||Maturity: ||1.67
[ top ]
3. Japanese warrant priced in Deutsche Marks
Assumption: The warrant exercise price is Y1,780, and it expires 26 October 1999. The warrant is trading at DM198, and the share price is Y1,450. The shares per warrant is 42 (i.e. each warrant confers the right to buy 42 shares).
At first glance this might appear a real mish-mash. However, by referring to the input data guidelines, we can work our way through this methodically.
- Firstly, we must make sure that all prices (share price, warrant and exercise prices) are in the same units. Here we have a mixture of currencies, so this must be dealt with. We will convert the DM warrant price into Yen.
Note: If we wanted, we could convert all prices into DM (or, in fact, into Zambian kwachas or Vietnamese Dong) it would make no difference to the calculations. But it is usual to convert into the currency of the exercise price.
We will assume that the Y/DM rate is 77.9, in which case we get a Yen price for the warrant of Y15,424. All prices are now in Yen.
- The next adjustment necessary is to convert the warrant price to a per share basis. Each warrant covers 42 shares, so we must divide the warrant price by 42. This gives us an adjusted warrant price of Y367.
The inputs to the calculator are:
|Share Price: ||1450 ||Exercise Price: ||1780
|Warrant Price: ||367 ||Maturity: ||4.0
[ top ]
[ NumaWeb Home ]
Copyright © 1995 Numa Financial Systems Ltd. All rights reserved.