How to calculate premium of warrant oh How to calculate premium of warrant

This post is from Ooi Teck Bee of I3 investor:

Link: http://klse.i3investor.com/servlets/cube/post/tbooi1168.jsp


Dear valued members, 

I believe the method to calculate intrinsic value of Warrant is very complicated, I suggest we do it in a practical and easy way so that everyone can use it effectively. 

Premium = ((Current Warrant price + Exercise price)/ mother share price - 1)*100% 

e.g 1 - Pantech-WA 
Closing price on 14/6/2013. 
Pantech-WA = 0.485, Mother share (Pantech) = 0.925 
Exercise price = 0.60, Expiration date = 2020 

Premium = ((0.485+0.60)/0.925-1)*100% = 17.29% 

Expiration date is > 1 year, premium <= 20% is acceptable according to current KLSE quotation (practical approach). 
Hence buying Pantech-WA at 0.485 is considered to be a good buy (17.29% premium). 
Pantech-WA should be 0.51 if it is trading at 20% premium. Any price < 0.51 is considered as a good buy. 

e.g 2 - KSL-WA 
Closing price on 14/6/2013. 
KSL-WA = 0.935, Mother share (KSL) = 2.18 
Exercise price = 1.60, Expiration date = 19/8/2016 

Premium = ((0.935+1.60)/2.18-1)*100% = 16.28% 

Expiration date is > 1 year, premium <= 20% is acceptable according to current KLSE quotation (practical approach). 
Hence buying KSL-WA at 0.935 is considered to be a good buy (16.28% premium). 
KSL-WA should be 1.01 if it is trading at 20% premium. Any price < 1.01 is considered as a good buy. 

Note 
If expiration date is < 1 year, premium paid should be <= 10%. Please take note. 

I hope all students can make full use of these examples to improve your knowledge and skill. You must practise a few times in order to be good. 

Thank you. 
Ooi

2 comments

Partially correct !

If d expiry is about 10 years , Premium < 40% oso acceptable , if ard 5 years , 30% is acceptable

This is bcos of holding cost ! d longer d period is , u save more holding cost .

If its expiry date is less than 1 year , premium less than 10% oso unacceptable !