SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Equity Bottom-Up

Mapletree Pan Asia Commercial Trust / Equity Bottom-Up

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Issued by Macquarie Bank, the Call Warrants on Ascendas REIT (A-REIT) and Mapletree Commercial Trust (MCT) have an exercise price of $3.50 and $2.40 respectively. Both warrants have a longer-dated expiry of 2 March 2021. 
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Both call warrants are out-of-the-money (OTM) warrants as their exercise price is higher than the current closing price of A-REIT and MCT. The cost to buy an OTM warrant is usually lower than an in-the-money (ITM) warrant but an OTM warrant is also likely to have a lower price sensitivity. 
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A-REIT and MCT have posted a recovery in their stock price from March and have a year-to-date total return of +3.8% and -17.4% respectively. Both REITs have seen recent significant swings in their unit prices with 260-day volatility at 32% and 37% respectively.
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Structured warrants (“Warrants”) are financial instruments issued by a third-party financial institution, in this case Macquarie Bank, and are traded in the SGX securities market. Warrants offer investors an alternative instrument to participate in the price performance of an underlying asset at a fraction of the underlying asset price. They can also be used as hedging tools to reduce or diversify investors’ portfolio risks. Warrants have a limited lifespan and if not exercised, become worthless at expiration. Any failure of the issuer or guarantor to perform obligations when due (e.g. issuer becomes insolvent), may result in the loss of an entire investment.

Specifications of the new A-REIT and MCT Call warrants

A summary of the warrant terms is tabled below.

Call warrants are for investors who have a bullish view of the underlying asset (i.e. the investor takes the view that the price of the underlying asset will go up).

<table class="table table-striped"><tbody>
<tr>
<td>
			Counter name
			</td>
			<td>
			Code
			</td>
			<td>
			Type
			</td>
			<td>
			Exercise Price
			</td>
			<td>
			Warrants per share
			</td>
			<td>
			Delta
			</td>
			<td>
			Effective Gearing
			</td>
			<td>
			Expiry Date
			</td>
		</tr>
<tr>
<td>
			AscendasReit MBeCW210302
			</td>
			<td>
			WQ6W
			</td>
			<td>
			Call
			</td>
			<td>
			3.50
			</td>
			<td>
			5.5
			</td>
			<td>
			44%
			</td>
			<td>
			 4.2x
			</td>
			<td>
			2 March 2021
			</td>
		</tr>
<tr>
<td>
			MapleComTr MB eCW210302
			</td>
			<td>
			9EFW
			</td>
			<td>
			Call
			</td>
			<td>
			2.40
			</td>
			<td>
			3.5
			</td>
			<td>
			42%
			</td>
			<td>
			 3.9x
			</td>
			<td>
			2 March 2021
			</td>
		</tr>
</tbody></table>
 Source: Macquarie Singapore Warrants Website (Data as of 27 March, 9am)

Investors are advised to read the issuer documents found on SGX website (click <a href="https://www.sgx.com/securities/company-announcements?value=MACQUARIE%20BANK%20LIMITED&amp;type=company">here</a>) or Macquarie’s warrant website (click <a href="https://www.warrants.com.sg/home">here</a>) for the full details of the warrants including the risks before investing in the warrants.

Longer-dated warrants 

Warrants have a finite lifespan and will lapse on its expiry date. Both the A-REIT and MCT call warrants are expected to expire in 9 months on 2 March 2021.

For all warrants there is a holding cost and this is commonly known as time decay. The time value of the warrant erodes with time, and accelerates towards the warrant expiry. A rule of thumb is that a warrant loses 1/3 of its time value in the first 2/3 of its life.

With longer-dated warrants, warrant investors who wish to take a longer view over the underlying shares will see slower time erosion on the warrants compared to shorter-dated warrants. However long-dated warrants are also expected to have a lower effective gearing (leverage) than shorter-dated ones.

<a href="https://www.warrants.com.sg/eduhtml?p=effectivegearing">Effective gearing</a> is the % change in the price of a warrant relative to a 1% change in the underlying. The A-REIT and MCT call warrants have an effective gearing of approx. 4 times, meaning it will move approximately 4% for a 1% move in underlying shares. 
Investors can use Macquarie’s <a href="https://www.warrants.com.sg/tools/warrantcalculator">Warrant Calculator</a> for an estimation of the time erosion/holding costs of the warrants over the holding period they are looking at.

Out-of-the-money warrants

Moneyness refers to the relationship between the exercise price and the current share price. For a call warrant, if the exercise price is below the underlying asset price, that call warrant will be “In-The-Money” (ITM). If the exercise price is above the underlying asset price, it will be “Out-Of-The-Money” (OTM).

The cost to buy an OTM warrant is generally lower than the cost to buy an ITM warrant. This is because at the time of the purchase, OTM warrants have no intrinsic value (only time value). And while the potential for a 100% loss is greater, the cost (and risk) to enter the trade is lower and the effective gearing can go higher if the underlying stock moves in the investor’s favor, since the initial cost is relatively low.

On the other hand, OTM warrants have lower price sensitivity (Delta) compared to ITM warrants. The delta of a warrant is the approximate change in the warrant price for a small change in the underlying asset price. A tip from <a href="https://www.warrants.com.sg/eduhtml?p=delta">Macquarie</a>: Delta can also be viewed an indicator or estimate of the probability that a warrant will expire ITM (i.e. with value). Simplistically, this means that a warrant with 20% delta can be said to have an approximate probability of 20% to expire ITM.

Both ITM and OTM warrants have their own advantages and disadvantages, and may be suited to different investors and/or different trades.

Share price performance of A-REIT and MCT

As shown in the chart below, A-REIT and MCT have posted a recovery in their stock price from March and have a year-to-date (YTD) total return of +3.8% and -17.4% respectively.

While both A-REIT and MCT have averaged 39% total returns for the past three years, both REITs have seen recent significant swings in their unit prices with 260-day volatility at 32% and 37% respectively. 
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 <img src='https://api2.sgx.com/sites/default/files/2020-05/Total%20return%2027%20May.png' alt='Total Return YTD' />
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 <div class='content-caption'>Total Return YTD</div>
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Investors can use Macquarie’s <a href="https://www.warrants.com.sg/tools/livematrix">Warrants Live matrix</a> to see where Macquarie’s bid and offer prices will be for the A-REIT and MCT warrants for a range of given underlying stock prices.

Where can I find more information?

Investors can find more resources on <a href="http://www.sgx.com/warrants">SGX Warrants page</a> or the <a href="https://www.warrants.com.sg/">Issuer’s website</a>. Investors should also read all listing documents provided by the issuer for product features, risks and other information related to the product before trading the warrants. The listing documents can be found under “Company Information” on the SGX website or the issuer’s website.

Specified Investment Products (SIP)

Structured warrants are for investors who are willing to accept the risk of substantial losses up to the principal investment amount, possibly within a very short timeframe. Investors should also have sufficient understanding of the product and should possess either a high level of knowledge or sufficient trading experience to properly evaluate and assess the product structure, associated risks, valuation, costs and expected returns. All investors need to be Specified Investment Products (SIP) qualified to invest in structured warrants.
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Issued by Macquarie Bank, the Call Warrants on Ascendas REIT (A-REIT) and Mapletree Commercial Trust (MCT) have an exercise price of $3.50 and $2.40 respectively. Both warrants have a longer-dated expiry of 2 March 2021.  
	 
	
Both call warrants are out-of-the-money (OTM) warrants as their exercise price is higher than the current closing price of A-REIT and MCT. The cost to buy an OTM warrant is usually lower than an in-the-money (ITM) warrant but an OTM warrant is also likely to have a lower price sensitivity. 
	 
	
A-REIT and MCT have posted a recovery in their stock price from March and have a year-to-date total return of +3.8% and -17.4% respectively. Both REITs have seen recent significant swings in their unit prices with 260-day volatility at 32% and 37% respectively.


Structured warrants (“Warrants”) are financial instruments issued by a third-party financial institution, in this case Macquarie Bank, and are traded in the SGX securities market. Warrants offer investors an alternative instrument to participate in the price performance of an underlying asset at a fraction of the underlying asset price. They can also be used as hedging tools to reduce or diversify investors’ portfolio risks. Warrants have a limited lifespan and if not exercised, become worthless at expiration. Any failure of the issuer or guarantor to perform obligations when due (e.g. issuer becomes insolvent), may result in the loss of an entire investment.

Specifications of the new A-REIT and MCT Call warrants

A summary of the warrant terms is tabled below.

Call warrants are for investors who have a bullish view of the underlying asset (i.e. the investor takes the view that the price of the underlying asset will go up).




			Counter name
			
			
			Code
			
			
			Type
			
			
			Exercise Price
			
			
			Warrants per share
			
			
			Delta
			
			
			Effective Gearing
			
			
			Expiry Date
			
		


			AscendasReit MBeCW210302
			
			
			WQ6W
			
			
			Call
			
			
			3.50
			
			
			5.5
			
			
			44%
			
			
			 4.2x
			
			
			2 March 2021
			
		


			MapleComTr MB eCW210302
			
			
			9EFW
			
			
			Call
			
			
			2.40
			
			
			3.5
			
			
			42%
			
			
			 3.9x
			
			
			2 March 2021
			
		

 Source: Macquarie Singapore Warrants Website (Data as of 27 March, 9am)

Investors are advised to read the issuer documents found on SGX website (click here) or Macquarie’s warrant website (click here) for the full details of the warrants including the risks before investing in the warrants.

Longer-dated warrants 

Warrants have a finite lifespan and will lapse on its expiry date. Both the A-REIT and MCT call warrants are expected to expire in 9 months on 2 March 2021.

For all warrants there is a holding cost and this is commonly known as time decay. The time value of the warrant erodes with time, and accelerates towards the warrant expiry. A rule of thumb is that a warrant loses 1/3 of its time value in the first 2/3 of its life.

With longer-dated warrants, warrant investors who wish to take a longer view over the underlying shares will see slower time erosion on the warrants compared to shorter-dated warrants. However long-dated warrants are also expected to have a lower effective gearing (leverage) than shorter-dated ones.

Effective gearing is the % change in the price of a warrant relative to a 1% change in the underlying. The A-REIT and MCT call warrants have an effective gearing of approx. 4 times, meaning it will move approximately 4% for a 1% move in underlying shares.  
Investors can use Macquarie’s Warrant Calculator for an estimation of the time erosion/holding costs of the warrants over the holding period they are looking at.

Out-of-the-money warrants

Moneyness refers to the relationship between the exercise price and the current share price. For a call warrant, if the exercise price is below the underlying asset price, that call warrant will be “In-The-Money” (ITM). If the exercise price is above the underlying asset price, it will be “Out-Of-The-Money” (OTM).

The cost to buy an OTM warrant is generally lower than the cost to buy an ITM warrant. This is because at the time of the purchase, OTM warrants have no intrinsic value (only time value). And while the potential for a 100% loss is greater, the cost (and risk) to enter the trade is lower and the effective gearing can go higher if the underlying stock moves in the investor’s favor, since the initial cost is relatively low.

On the other hand, OTM warrants have lower price sensitivity (Delta) compared to ITM warrants. The delta of a warrant is the approximate change in the warrant price for a small change in the underlying asset price. A tip from Macquarie: Delta can also be viewed an indicator or estimate of the probability that a warrant will expire ITM (i.e. with value). Simplistically, this means that a warrant with 20% delta can be said to have an approximate probability of 20% to expire ITM.

Both ITM and OTM warrants have their own advantages and disadvantages, and may be suited to different investors and/or different trades.

Share price performance of A-REIT and MCT

As shown in the chart below, A-REIT and MCT have posted a recovery in their stock price from March and have a year-to-date (YTD) total return of +3.8% and -17.4% respectively.

While both A-REIT and MCT have averaged 39% total returns for the past three years, both REITs have seen recent significant swings in their unit prices with 260-day volatility at 32% and 37% respectively. 



      
    
    Total Return YTD


Investors can use Macquarie’s Warrants Live matrix to see where Macquarie’s bid and offer prices will be for the A-REIT and MCT warrants for a range of given underlying stock prices.

Where can I find more information?

Investors can find more resources on SGX Warrants page or the Issuer’s website. Investors should also read all listing documents provided by the issuer for product features, risks and other information related to the product before trading the warrants. The listing documents can be found under “Company Information” on the SGX website or the issuer’s website.

Specified Investment Products (SIP)

Structured warrants are for investors who are willing to accept the risk of substantial losses up to the principal investment amount, possibly within a very short timeframe. Investors should also have sufficient understanding of the product and should possess either a high level of knowledge or sufficient trading experience to properly evaluate and assess the product structure, associated risks, valuation, costs and expected returns. All investors need to be Specified Investment Products (SIP) qualified to invest in structured warrants.



New Call Warrants on A-REIT and MCT listed on 27 May

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New Call Warrants on A-REIT and MCT listed on 27 May

Issued by Macquarie Bank, the Call Warrants on Ascendas REIT (A-REIT) and Mapletree Commercial Trust (MCT) have an exercise price of $3.50 and...

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