Instalment Warrants - how do they work in practice?

[Joska]

Just learning about instalment warrants. I've read some literature, but I'm still not crystal clear.

Say I buy instalment warrant, I choose highly geared one close to maturity date. I see that completion payment + last offer price is higher than less geared ones, makes sense.

Not entirely clear on what happens once I've purchased that warrant. I believe as expiry approaches I can
1. make second payment (obtain ownership),
2. roll into new instalment, (don't know actually how/where to do this)
3. if share price falls, what happens to my warrant after expiry, do I lose my money?
4. sell instalment on market - will it be worth anything?
Also, not sure about time decay? What is that?

 

[RichKid]

There's a free warrants course on the www.asx.com.au website and also a free warrants booklet, but someone may have a quicker answer to your question here...sorry I don't know much about instalments.

 

[RodC]

Just learning about instalment warrants. I've read some literature, but I'm still not crystal clear.

Say I buy instalment warrant, I choose highly geared one close to maturity date. I see that completion payment + last offer price is higher than less geared ones, makes sense.

Not entirely clear on what happens once I've purchased that warrant. I believe as expiry approaches I can
1. make second payment (obtain ownership),
2. roll into new instalment, (don't know actually how/where to do this)
3. if share price falls, what happens to my warrant after expiry, do I lose my money?
4. sell instalment on market - will it be worth anything?
Also, not sure about time decay? What is that?

1. Yes you can make the payment.
2. Warrant issuer (eg: Macquarie, Westpac) will send you info on how to do this if there is another issue available.
3. Issuer will usually buy it back at the last market price (less overheads), once again they will send you info prior to expiry detailing your options, this is what will usually happen if you do nothing.
4. can only sell it on the market before expiry, it's not worth anything after it's expired.

warrant prices are usually made up of the intrinsic value + a time value.
A warrant over a $20 share with a $18 exercise price should be worth $2 (intrinsic value). Often however you will find that the warrant price will be say $2.50. the extra $0.50 is the time value, this is the "hope" value that the underlying share price will increase to say $20.50 between now and expiry. As the time to expiry gets closer, the time value decays.

Rod.

 

[denk]

Its maybe important to add...

1) Instalment warrants involve non recourse loans, so there are two essential piggy-backed contracts

a) a loan; that the issuer charges for -

(and then there are other sundry fees that are attributed to the purchase that have tax consequences, and a high hassle factor for the charges involved. This attribution is petty in the extreme and may keep many erudite tax officials feeling smug, but is really all balderdash - as it merely contributes to a 'fog dimension' and probably does more to steer off investors, as much as reading 100 page plus high 'fog index' PDS's do. Compare going to buy a suit, and the shop contracts you into multiple 'x' contracts i) to cover the salaries of the staff ii) linen cost iii) store rental iv) the returns/guarantee cost ...etc! What do you care - all you want is a suit ¿ ¿ ...similarly in an instalment all you want is a geared position on a certain stock/share)
(non- recourse if your stocks really hit the wall, to the extent that your 'loan security' = nada / zip and you actually owe the bank in excess of your security you are covered (by one of the gurantee costs paid - as explained))

AND

b) the sale of the shares.

2) Trade warrants are not loans, the issuer is writing short and long positions, and maintains a hedge against his (her ¿) own loss, and profits from your bad purchases/trades.

You have no ownership.

Point is;

In the former the issuer's business is principally the making of loans
For the payment of interest you get to receive all the benefits of ownership...except voting, but you also get a low gearing (mostly) relative to the trades.

whereas

In the latter the issuer's principal business is to receive/earn premium income on the positions written.
Premiums are highest 'at or about the money' so this is where the trade warrants are sold. For the higher premium you get a much higher gearing (well at least you should do ...)

Finally they are both great instruments, with entirely two different purposes.

The trades warrants should be every trader's first (cautious) step into geared and derivatrive positions, rather than say pure options. Instalments should be in every SMSF.

(What the hell , every taxpayer ought buy at least buy one instalment per annum, if only to keep the lads in the tax office on their toes!)

Hope this helps ...FWIW

 

[divs4ever]

this is probably the wrong thread , but how did instalment warrants handle last years chaos with divs

i particularly looking at the self-funded warrants and extreme market conditions

cheers