# Instalment warrant



## Fab (8 September 2006)

Hi,

I am currently willing to invest on ZFX mainly because a big dividend payment is due on the 16/10 and that I think the share price will keep on going up specially during the christmas period therefore in order to benefit of the dividend and possible share increase I am thinking to invest in installment warrant.
My issue is I don't know much about the installment warrant. Could anyone explain me how they work and what are the benefits and risks of it. Starting to how I will get the dividend payment when it comes.

The warrant I am thinking to buy at this stage is ZFXIMH. Please let me know if you think it is not a good one.

Cheers


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## NettAssets (8 September 2006)

*Re: Installment warrant*

Hi Fab 

TFA still has the story on installment warrants on the front page have a look at http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=FBBDA01A-17A4-1130-F5D1EDA11984ACA3
NA


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## Magdoran (8 September 2006)

*Re: Installment warrant*

Hello Fab,


Go to:

http://www.asx.com.au/index.htm

In the search area type in “Warrants”, and this will give you a range of links to warrant related documents.

Fab, I say again as I did on the “Options Trader Magazine” thread, please understand that by asking for specific financial advice as you have done twice now, for an evaluation of a specified warrant, anyone responding in a specific and non generic way could potentially be in breech of the law.  You are asking posters on this site to take a huge risk, and this isn’t fair on individuals who may not realise the way the new laws work.

Asking about how warrants work is fine.  If you ask general questions we can answer them, just not specific ones, OK? 

I have taken the time to format the ASX PDF on Warrants on the section dealing with instalment warrants. Also, I gave you the tools to do your own research on the ASX site when I responded to your question on the “Options Trader Magazine” thread.  Please go to the ASX site as suggested (please, register for the free online courses – these will really help you to understand how warrants work), or to a qualified derivative expert, or both for more detailed information.



> *Here is an excerpt from the ASX PDF on Warrants:*
> 
> 
> *Instalment warrants*
> ...






Regards


Magdoran


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## Magdoran (8 September 2006)

*Re: Installment warrant*



			
				Fab said:
			
		

> Hi,
> 
> I am currently willing to invest on ZFX mainly because a big dividend payment is due on the 16/10 and that I think the share price will keep on going up specially during the christmas period therefore in order to benefit of the dividend and possible share increase I am thinking to invest in installment warrant.
> My issue is I don't know much about the installment warrant. Could anyone explain me how they work and what are the benefits and risks of it. Starting to how I will get the dividend payment when it comes.
> ...



Hello Fab,

I couldn't fit everything into 1 post since the word limit kicked in...

So, here's the rest:

Ok, a quick set of things to think about when looking at dividend stripping approaches.  

Firstly be careful, because the value of many warrants will be adjusted for dividends, and the revaluation happens after the ex-dividend date, and usually the value of call instalment warrants are reduced in value by the issuer to reflect the value of the dividend.

If a stock then continues to fall in value, this can really reduce the value of the warrant.  Depending if the warrant strike price is in ITM (in the money, ATM (at the money), or OTM (out of the money), this can greatly effect the value of the warrant depending on the way the stock trends (I suggest that you both access the free online courses available through the ASX to see these effects which the courses cover, and also read up on warrants in detail).

If the warrant is deep in the money, the level of exposure can be higher than at or out of the money series.  However the premiums further out of the money can be higher, so beware of this trade off.

Another aspect to consider is time decay.  The time value of a warrant falls as it moves towards its expiry date (although this can be a reset date – you need to read up on this). So, depending on how much time value was contained at the time of purchase, even when the underlying stock moves in a favourable direction, the warrant can actually fall in value because the loss in time value can be greater than the gain in the underlying stock.  Just be aware of this.

Another risk to consider is that the issuer sets specific conditions for each warrant series, and that the issuer may vary the value of the warrant based on the terms and conditions, so read these carefully.  Also, don’t forget that if the issuer becomes insolvent, that this is a real risk with the warrant.

Watch out for the width of the bid and the ask in the actual market if purchasing a warrant here, this can vary.  Also beware of things like the ratio of warrants to the underlying, the ratio can have a significant impact on the real value of a warrant, and what appears cheap may not actually be so once you’ve evaluated the warrant.  

Also, note that there is a difference between American exercise and European exercise.  American exercise allows you to pay the residual value to obtain the shares up and until the expiry date, while European only allows this on the expiry date.


Good luck Fab.


Regards


Magdoran


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## Fab (8 September 2006)

*Re: Installment warrant*

In an installment warrant is the dividend paid directly to the warrant holder ( in that case myself ??)


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## NettAssets (8 September 2006)

*Re: Installment warrant*



			
				Fab said:
			
		

> In an installment warrant is the dividend paid directly to the warrant holder ( in that case myself ??)




Re-read and understand Magdorans posts its all there

Regards
John


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## Fab (20 October 2006)

*Re: Installment warrant*

How does the 45 days rule works with instalment warrant after earning over $5000 of franking dividend for the financial year.

If hold some shares over 45 days period and other for less than 45 . How do I get tax ?


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## ozambersand (24 April 2007)

Regarding the previous post, there is an article available on the ASX site by Ernst & Young regarding the taxation of warrants. Not all the info is relevant but you will find your answer if you read the article. Broadly speaking, the 45 day rule is the same for instalment warrants as it is for shares as you really "own" the underlying warrant. If you do a cash extraction on those shares within the 45 day period, the position might be different so you better check with a professional!

Getting back to Magdoran's very good explanation I have a couple of other points to make, specifically in regard to trading instalment warrants on-line.

Firstly: Pricing Matrices

As they don't seem to be often traded on-line, the only offers in the buy and sell column are usually the issuer (Macquarie issued warrants are more popular so have a bigger market depth with "real people" taking part) fulfilling their obligation to "make a market".

When it is the issuer fulfilling their obligation to "Create a market at all times" there are a few points to be aware of.

The price they quote for the warrant is as per their pricing matrix, current for that warrant.

Usually these are kept up-to-date and published on the issuer's sites eg:
http://www.macquarie.com.au/wasp/dailytrader/dailytrader_dttradingpickofday_1.htm# for Macquarie or for UBS http://ibol42.ibb.ubs.com/public/in...nstalment&subnav=&bodypage=../iw/iwa_home.jsp

So that you can anticipate what a warrant price should be for a given stock price.

As Magdoran says, this relationship varies depending on how "In-the-money" or "out-of-the-money" they are and whether a dividend has recently been paid etc.

For example, back on March 5th when Zinifex closed at $15.73, an ABNAmro instalment warrant ZFXIZA was priced at $5.56.
Currently Zinifex is trading at $15.72 and ZFXIZA is valued at $5.01!  

This reflects the fact that a dividend was paid in the meantime.

The problem is that if you want to sell or buy and base your entry or exit point on a share price you need the pricing matrix to determine what the relative warrant price would be for that underlying share price at that time.

This is why pricing matrices are so important.

Now to my reason for the post!!!!!

ABNAmro has stopped putting pricing matrices on their website. I noticed that they hadn't been updated for two weeks back at the start of April and complained to ABNAmro by email on the 9th April and the next day there were none there and there still aren't, as you can see: http://www.abnamro.com.au/warrants/tools.asp?y=y (as of today (24th April)

I heard third hand that their excuse was that they had a software problem?????

This makes it very difficult to deal in ABNAmro warrants on-line through an E-broker. You can work out a rough matrix by checking Commsec as the share price fluctuates and see how the warrant quoted price changes in relationship and "Do the Math". But it is a pain.

Is anyone else having this problem?

I noticed that ABNAmro doesn't have any new American style warrants and the latest series of non-rolling ones expire in July, so they may not be committed to the whole concept of instalment warrants in general.

Looks like I better use a different issuer!

Secondly: Disappearing "Markets"

Another point to be aware of is that if you lodge a quote for a buy or sell at a particular price using Commsec (for example), the issuer's "market" may disappear when this price looks like it is going to be reached according to the matrix. Theoretically they have to create a market at all times (though I have heard conflcting reports on this) in practice on a couple of occasions I have watched a bid being in which should go because the underlying share price has been reached, but just before it gets there, the "top line - ie the issuer's market" disappears or the number available is ridiculously small.

My solution is to not lodge a bid and just put my bid in when the point has been reached (ie keep the issuer in the dark that a bid will be made). So far I have had success using this strategy, but it means you have to have a couple of windows open at the same time so you can match your bid to the share price as it fluctuates. 

It makes it difficult if you can't watch it all the time (which is probably why they recommend going through a broker!!!)


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## ozambersand (26 May 2007)

Well it took ABNAmro a month, but they have *finally* posted Pricing Matrices for their warrants again.

Mind you someone needs to explain to them where the decimal point should go! Currently all the prices in the matrices are being expressed in cents (not dollars and cents)

They also seem to have forgotten that the fifth letter (I or J) describes whether it is American style or European, as they are describing SHLJZE on the ASX site as being American style rather than European (which the code would imply). It makes a big difference if you want to exercise them prior to expiry.

I know instalment warrants don't seem to be a popular topic on Aussie Stock Forum, but anyone who trades in warrants online would appreciate how difficult it is without accurate information. 

In the meantime, I just used Macquarie, UBS and Citigroup which have great warrant sites! :


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