Warrants

Warrants are capital markets instruments that give the holder the right, but not the obligation, to buy ('call' warrant) or to sell ('put' warrant) an underlying asset at a specified price (the 'strike' price or 'exercise' price) on or before a predetermined date where such right is exercised by registered delivery or cash settlement. The holder of a warrant buys not the underlying security itself, but the right to buy or sell such underlying security, against the payment he makes.

Warrants;

-are securitized options;

  • listed on a stock exchange and traded in the relevant market segment.
  • traded in the secondary market.
  • settled in the same way as other securities.

-are financial instruments of type called “structured products” are not issued for financial needs of the issuers

-are solely under the responsibility of the issuer.

-entitle the holder to buy (from) or to sell (to) the issuer an underlying security, a basket of securities, or an index, on or before a particular date, at a predetermined price, against the premium he pays.

-represent a right, and not an obligation, for the holder.

The basic principles regarding the issue, issuers, registration, and trading of warrants are regulated by the Capital Markets Board of Turkey (CMB) by its Communiqué Series III No: 37 Regarding the Registration with the Capital Markets Board of Turkey and Trading of Intermediary Institutions’ Warrants at the Stock Exchange. According to the said Communiqué, warrants are traded on Borsa İstabul.

The procedures and principles regarding the listing and trading of warrants on Borsa İstabul are stipulated by İMKB's Circular no.318, dated Jan 5, 2010.

Warrants may be traded on Borsa İstabul provided that they are supported through market making activity by their issuers or the brokerage companies contracted by the issuers. In order to provide a liquid and well-regulated market, the market maker is required to give quotations continuously.

Investing in Warrants

Warrants are included in the class of structured products, which carry the qualities of a securitized option. Warrants are written on a financial product or indicator. Such financial products, are called “underlying instruments”.

If the underlying instrument of a warrant is a single equity or a basket of equities, we use the term “underlying asset”, whereas in the case of warrants written on an index, the term “underlying indicator” is used.

The “underlying asset”, may be a single equity or a basket of equities. Such equities must be traded on İMKB, and included in İMKB 30 Index.

Example: A call warrant issued by Z bank, entitling the holder to buy the shares of ABC Incorp. at TL 6.00 on 20.12.2014.

Example: A put warrant issued by Z bank, entitling the holder to sell the shares of ABC Incorp. at TL 5.00 on 20.12.2014.

Warrants written on an index, on the other hand, provide cash flow to the holder, on the basis of the underlying index value on a particular date. Such indices are equity indices calculated by İMKB.

Example: A call warrant issued by Z bank, which entitles the holder to buy İMKB-100 Index at 80,500 points on 20.12.2014.

Example: A put warrant issued by Z bank, which entitles the holder to sell İMKB-30 Index at 70,500 points on 20.12.2014.

In contrast to equities, warrants do not offer the following rights:

-Dividend

-Pre-emptive right

-Share in liquidation

-Taking part in the company management

-Voting and right to information.

The buyer of a warrant does not buy the equity itself, but the right to buy or sell such security.

Risks of Investing In Warrants:

- Warrants have an expiry day and therefore a limited life.

- Due to leverage, buying warrants may be to one’s advantage or disadvantage, and therefore it should be taken into consideration that leverage may lead to high return as well as loss.

- As a result of the price fluctuations in the market, the invested money may be entirely lost. However, with warrants, the risk is limited to the amount paid for the warrant, the commission and other fees.

- It should be considered that the technical and fundamental analyses for warrant trade are subjective and the anticipations of such analyses may not be realized.

The issuer’s risk management policy against the risks associated with issuing warrants must be included in the prospectus. In accordance with the Communiqué, the prospectus is announced in the web sites of the issuer and the market maker. Investors should carefully examine the issuer’s risk management policy before making investment decisions.

Pricing and Valuation

Price of the Underlying Asset

There is a positive correlation between the price of the underlying instrument and a call warrant, while this correlation is negative in the case of put warrants. As the price of the underlying asset increases, the price of call warrants increases and the price of put warrants decreases.

Exercise Price

There is a negative correlation between the exercise price of a warrant and call warrants, while this correlation is positive in the case of put warrants. As the exercise price increases, the price of call warrants decreases and that of put warrants increases.

Days to Maturity

There is a positive correlation between the days to maturity and both call and put warrants. As the days to maturity increase, the price of both call and put warrants increases.

Volatility

There is a positive correlation between the volatility of the underlying asset and both call and put warrants. As the volatility of the underlying asset increases, the price of both call and put warrants increases.

Market Interest Rate

There is a positive correlation between the interest rate and call warrants, while this correlation is negative in the case of put warrants. As the interest rate increases, the price of call warrants increases and that of put warrants decreases.

Dividend

There is a negative correlation between the dividend distributed by the company on whose equities the warrant is written and the price of call warrants, while this correlation is positive in the case of put warrants. As dividends increase, the price of call warrants decreases and that of put warrants increases.

Factors Influencing the Warrant Price

Warrant Price (CALL) Warrant Price(PUT)
Price of underlying asset + -
Exercise price - +
Days to maturity + +
Volatility + +
Market interest rate + -
Dividend - +
Trading Principles

Trading of warrants on Borsa İstanbul is regulated by a Circular issued by İMKB in accordance with the CMB arrangements.

Trading Method

Warrants are traded on the Warrant Market established within Borsa İstanbul Collective Products Market by “market making in multiple price - continuous auction system”. This system is operated by entry of buy/sell quotations by the market maker member in charge of the warrant and entry of buy/sell orders by members (including the market maker member) for such warrant. Each warrant has to be assigned a market maker, otherwise they can not be traded.

Market Maker

Borsa İstanbul member intermediary institution, determined by the issuer upon the approval of the CMB, and responsible for giving quotations for the warrants under its responsibility, in order to ensure the fair, orderly, and efficient functioning of the market, and to contribute to the formation of a liquid and continuous market for such warrants.

Quotation

A two-sided order that the market maker enters Borsa İstanbul Equity Market Automated Trading System (System), which includes information about the price at which and the quantity of the warrant that he is ready to buy and sell.

Main Trading Rules

- Orders are entered into the System according to price and time priority and are matched with the buy/sell orders and/or the quotations within the appropriate quotation interval (including quotation prices).

- The market maker member enters quotations for the relevant warrant. No order entry is accepted for warrants before the market maker member enters a quotation.

- Base price method is not applicable in warrant trading. Therefore, there is no upper or lower limit in price formation (margin is free).

- All trades in the market are realized within the interval of buy/sell quotations given by the market maker (including quotation prices) (the quotations given by the market maker are temporary price limits, in a way).Orders that fall out of the interval are also accepted to the System, but may be matched only when they are within the quotation interval.

- No orders or quotations are entered for warrants during the opening session.

-Orders entered for warrants may be cancelled during the session.

Trading Hours

Warrants are traded during continuous trading periods (10:00 - 18:00) of the session .