CWs for foreign stocks

CIMB Investment Bank Bhd ('CIMB') has launched of its second base prospectus for structured warrants yesterday, where it is expected to issue a total of 40 call warrants ('CWs') this year to take advantage of the Securities Commission's (SC) revised guidelines on structured warrants.

Under the revised SC guidelines, investment banks can issue call warrants, basket call warrants and “bull equity-linked structures” on local and foreign underlying stocks and indices.

Amongst the first batch of CWs on foreign underlying shares to be issued by CIMB are those of HSBC Holdings plc and Singapore Telecommunications Ltd shares. This follows closely on the heel of OSK’s earlier move to issue CWs on China Mobile Ltd, Industrial & Commercial Bank of China & PetroChina Company Ltd.

From the above, you can see that the foreign underlying shares selected are listed either on the HKE or SGX. The trading volume of structured warrants on these two exchanges is many time higher than that is on our exchange. To learn about structured warrants on SGX, go to here. For HKE, go here. The resource centre for derivative warrants of the HKE is very comprehensive. For example, they have a section for Derivative Warrants Pricing Calculation, where you can find the Options/Warrants Calculator.

To check on the prices of CWs traded on HKE & SGX, you must first understand their short name. For HKE, the short name indicates some of the basic features of the derivative warrant:

Example: KK-HSI@EP0608A

1. @: Cash Settlement; *: Physical Delivery
2. X: Exotic Warrant; E: European; R: Regional Warrants; Space: American
3. C: Call; P: Put; Space: Non Call/Put
4. Applicable if an issuer issues more than one warrants with the same underlying asset and expiry date. The warrant is distinguished by A, B, C... etc.

For SGX, the short name signifies:

Example: OCBC MBL XCW060119

1. e: European; Space: American
2. X: Non-traditional; Space: Traditional Warrant
3. CW: Call; PW: Out
4. DC: Represents a discount certificate
5. The expiration date is represented in this format: yymmdd
   

To track the price of CWs in SGX, just go here. For CWs listed on the HKE, it is a bit trickier. Firstly, you need to know the stock code (go here). Then key in the stock code here.

Some of you may ask why I should bother myself with all these things. Two reasons: firstly, your CW on any of these foreign underlying shares depend on the underlying share price. Secondly, you may want to see whether your CW is priced correctly by the Malaysian investors as compared to how similar CWs are priced on the home turf.

While these CWs may offer some diversification, I am afraid that our market may not be liquid enough for these CWs. Some may say that the market makers can step in to provide liquidity, but we have seen that this role has seldom being played effectively in Malaysia. In the end, the investors who buy these CWs may have to hold them to maturity. During this period, he or she will see part of the cost paid for these CWs wasted away; that part is known as the CW's conversion premium or time value.