Guide for Beginners

The price of the underlying assets is not the only factor that affects the warrant price...

  • Delta means the number units of the underlying assets that must be bought/sold to hedge for each unit of warrant sold/bought by the warrant issuer.

    For example, if the delta of a Tencent warrant is 0.3, for each warrant with the entitlement ratio of 1 sold by the issuer, 0.3 units of Tencent stocks must be bought as the hedge.

    The delta of call warrants ranges from 0 to 1, while the delta of put warrants ranges from -1 to 0. The more out-of-money a warrant is, the closer its delta is to 0. The delta’s level will affect the movement sensitivity of the warrant.

  • Sensitivity means how much the warrant price changes when the price of the underlying assets changes by 1 tick. For stock warrants, the formula is as follows:

    Stock warrant sensitivity =
    minimum spread of underlying assets × delta
    entitlement ratio × minimum spread of warrant
    For example, say the spot price of HSBC is $70, the delta of a 10:1 HSBC call warrant is 0.4, and its spot price is $0.120,
    its sensitivity is:
    0.05 x 0.4
    10 x 0.001
    = 2

    That is, when the HSBC stocks moves by 1 tick ($0.05), assuming all other factors remain unchanged, the warrant price will move by 2 ticks ($0.002).

  • The formula to calculate an index warrant’s sensitivity is as follows:

    Index warrant sensitivity =
    minimum spread of warrant × entitlement ratio
    delta

    To reiterate, if the delta of a 8000:1 Hang Seng Index call warrant is 0.45, and its spot price is $0.080,

    Its sensitivity is:
    0.001 x 8000
    0.45
    = 17.78

    That is, when the Index moves by 18 points, assuming all other factors remain unchanged, the warrant price will move by 1 tick ($0.001).

Consolidate your memory immediately!
When the price of the underlying assets
to equal the exercise price of the call warrant, the delta of the call warrant will gradually approach 1.
Will the warrant became valueless upon expiry?
Please refer to
"Settlement: Settlement of Warrant upon Expiry"
Factors that Affect the Warrant Price (I)
Correct!
The delta of a call warrant ranges from 0 to 1. The closer an out-of-the-money warrant is to the exercise price, the closer the delta is to 1.
Wrong!
The delta of a call warrant ranges from 0 to 1. The closer an out-of-the-money warrant is to the exercise price, the closer the delta is to 1.