Right, Warrant and Option
Learning Goals
 Understand what is Right offering and its
characteristics
 How to value Right
 Understand what is Warrant and how to value warrant
 Understand what is Option and how to value option
Right and Its Characteristics
 An option that gives the existing shareholders an
opportunity to acquire additional new share at a
specified price (subscription or exercise price) over a
specified short period of time
 Usually the specified price is set below the market
price
 Option is valid only between 2 – 3 weeks. If it is not
being used by that date, it will become worthless.
 Allow the existing shareholders to purchase only a
fraction of the new share
 The market Price of Shares after a Right Issue:
The Theoretical Ex-Rights price
 When the rights are announced, the existing
shareholders are entitled to the rights. The shares
therefore are described as ‘cum-rights’ (with right
attached) and will be traded ‘cum-rights’
 After the new shares are being issued, the rights no
longer exists and the shares are now ‘ex-rights’ (without
right attached)
 Value of a right
Cum-right price
Ex-right price =
=
MP of shares
=
MP s - S
N+1
-
Subs. Price
No. right + 1
(MP of
x
N) + Subs. Price
common stock
No. right + 1
=
(MPs x N) + S
N+1
Advantages of Right
 It enables the existing shareholders to acquire
additional shares without paying the normal
brokerage fees
 Priority is given to the existing shareholders in
acquiring the shares and subscription price (or
exercise price) offered is below market price.
 Percentage of holdings will unaffected if the
shareholders take up their rights
Disadvantages of Right
 The life of right is too short. Shareholders have to act
fast or else they will lose the opportunity.
 The difference between the market price and
subscription price (exercise price) is sometimes too
narrow to allow for substantial profit.
 Shareholders must have sufficient cash available to
take advantage of this opportunity.
Warrants or Transferable
Subscription Right
 A long-lived option that gives the holder the right to




buy fixed number of ordinary shares directly from the
company at a specified price (subscription or exercise
price) within a specified time period (before expiration
date)
No voting rights
No claims on the company’s assets
No dividends
Life of warrant is longer compared to rights. It can
range from 3 - 10 years or even 20 years or more and
some do not have maturity at all
 Normally attached to a corporation’s issue of senior
security such as bond or preferred stock
 Attachment will make it possible for the investor to
received fixed income return from interest of the bond
or dividend of the preferred stock but also an
opportunity to buy common share of the issuing
company
 Usually detached from the accompanying securities
and traded independently as separate securities. If the
owner does not want to exercise the warrant, they can
sell to other investors through Bursa Malaysia Stock
Exchange.
 The non detachable warrant cannot be traded
independently of the senior security.
 An investors can invest in warrants in 2 ways
 Call the broker, inform them the warrants that you wish to
buy, pay the normal brokerage commissions. If you look at
the share prices in the business section of any local
newspaper, you will find them listed together with the stocks
buy identified with symbol ‘w’. When the price of the warrant
is low, you will purchase them in anticipation of price
increase in the future. The differential in purchase and
selling price will be the profit after deduction the transaction
cost or;
 Invest in warrants and exercise the warrant when the price of
the shares in the market is high. This is especially true when
you could purchase the shares from the company at a lower
price and sells at the market for profit.
 Two obvious features that differentiate warrants from
rights are:
 Warrants are issued to holders of warrants which may
not necessarily be the shareholders of the company.
 Warrant give right to purchase one whole new share or
more whereas rights only allow purchasing a fraction of
new share.
Features of Warrant
 Exercise price is the price that stated on the warrant and
the amount an investor must pay to purchase the specific
number of shares
 Conversion ratio is the number of common shares that
can be obtained at the exercise price with one warrant.
 Expiration date is the day when the warrants are no
longer having the privilege of buying common stock at
specific price. Most warrant issued with the life span of 5
to 10 years.
 In Malaysia, most of the listed companies in the BMSE
issue bonds with detachable warrants. Non-detachable
warrants must be sold with the original securities to which
they are attached.
Value of a Warrant
Intrinsic = (Market price Exercise price)
Value
of share
of warrant
= (MPs - EPw) x ER
x
Exercise ratio
Speculative value/ = Market value of warrant - Theoretical value
Premium value ($)
Speculative value / =
Premium value (%)
speculative value ($)
Theoretical value
 Some of the speculative factors that will affect the premium
include:
 Remaining warrant life. The smaller the remaining life of a
warrant, the less valuable it becomes. This is because the
opportunity to make profit declines.
 Price volatility of the share. The more volatile is price of
the shares, the more chance the value of the warrant
appreciates above the theoretical or intrinsic value. Investor
will be more willing to pay a larger premium for such a
warrant.
 The leverage Potential of Warrant. Warrant offered
investors a cheaper way to invest because the purchase of a
number of warrants is always cheaper than the purchase of a
corresponding number of ordinary shares.
Advantages of Warrant
 Warrants have a tendency to behave like the common
stock to which they would be converted into
 Warrants are cheaper than the common stocks
 The low capital investment of warrants has lower
downside risk than the underlying stock.
Disadvantages of Warrant
 To invest in warrants, one must be knowledgeable
about the exercise price and expiration date for
conversion
 It pays no dividend therefore investors do not get
current income
 It carries an expiration date.
Options
 2 types of options
 Call option

a negotiable instrument that gives the holder (buyer) the right
to buy the underlying security at a specified price over a set
period of time from the seller/maker/writer in exchange for a
fee paid to the seller/maker/writer

The buyer of the call option wants the price of the underlying
assets to go up

The seller/maker/writer of the call option wants the price of
the underlying assets to go down

Covered call: seller owns the asset
Naked call: seller does not own the asset

 Calculation:
 The call option of Syarikat AG stock has a strike price of RM20
and a cost of option RM2 per share with one month expiration
date. The current market price of the share is RM16. If you buy
2 lots of shares, calculate the profits or losses at the expiration
date if the price is RM 30.
(1 lot = 100 unit of share)
Buy shares at RM20 x 200 shares =
Cost of option RM 2 x 200 shares =
Total cost
=
Sell shares at RM30 x 200 shares
Profit
=
4,000
400
4,400
6,000
1,600
 Profit /loss = [(SP – MP) x No. of share] – cost of call
= [(30-20) x 200] – 2 (200)
= RM 1,600
 Put option
 a negotiable instrument that enables the holder (buyer)
to sell the underlying security at a specified price over a
set period of time to the seller/maker/writer in exchange
for a fee paid to the seller/maker/writer
 The buyer of the put option wants the price of the
underlying assets to go down
 The seller/maker/writer of the put option wants the
price of the underlying assets to go up
 Calculation
 The cost of the put option for Syarikat Gemilang is RM150 per lot. The
striking price is RM12. You wish to sell 3 lots. The market price of the
share is RM15. Determine your profit or loss if you exercise the option
at 1 lot for RM7.00 per share and at 2 lots for RM8.00 per share.
Sell shares at RM12 per share x 300
Less:
Cost of Option RM150 per lot x 3 lots
Gross profit
Less:
Buy shares at RM7.00 per share x 100 shares
Buy shares at RM8.00 per share x 200 shares
Profit
=
3, 600
=
=
450
3, 150
=
=
=
700
1600
850
 Profit/loss = [(SP-MP) x No. of share] – cost of put
Profit
= [(12-7) x 100] – 150
= RM 350
= [(12-8) x 200] – 300
= RM 500
= RM350 + RM500
= RM850