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
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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 !
Kamsia for your input.