(15.5 - 15.28) ÷ 10 = $0.022
Once it reaches the last trading day, trading for a warrant will stop while it awaits settlement. Once expired, a warrant will be settled in cash and delisted automatically.
Note that the value of an out-of-the-money warrant after settlement is zero. Only an in-the-money warrant has a cash value at settlement. The formula for the settlement of a warrant upon expiry is as follows:
Cash value of a call warrant = (settlement price - exercise price) ÷ entitlement ratio
Cash value of a put warrant = (exercise price - settlement price) ÷ entitlement ratio
To settle warrants, you need to put the settlement price into the formula. The settlement price of a stock warrant is the average closing price of the underlying stock for the 5 trading days prior to the expiry date. For example:
A 10:1 HSBC call warrant has the exercise price of $68, its expiry date is May 31, and the final trading day is May 27:
Mon | Tue | Wed | Thu | Fri | Sat | Sun | |
---|---|---|---|---|---|---|---|
May 22 | May 23 | May 25 | May 26 | ||||
Closing price of HSBC | 68.25 | 68.45 | Closed | Closed | |||
May 27 | May 28 | May 29 | May 30 | May 31 | |||
Closing price of HSBC | 67.95 | 68.35 | 68.65 | 68.95 | 69.1 |
The settlement price is calculated based on the closing prices of May 23 and May 27 to 30, while the price on the expiry date (May 31) is not taken into account.
The settlement price = (68.45 + 67.95 + 68.35 + 68.65 + 68.95) ÷ 5 = $68.47
The cash value after settlement = (68.47 - 68) ÷ 10 = $0.047
To settle an index warrant, the EAS (i.e., the 5-minute average price announced by the Exchanges) on the expiry date of the warrant will be taken as the settlement price.
For example, the exercise price of a Hang Seng Index call warrant is 28,888 points, its entitlement ratio is 8,000: 1, its expiry date is May 30, and the EAS on the expiry date is 29,228 points: