Table of contents
Introduction: Intro of derivatives to SA fin markets
The South African futures market started informally on an over the counter basis in 1987 and Rand Merchant Bank fulfilled the clearing house role (Alexander: 1996). According to Alexander, the Johannesburg Stock Exchange (JSE) together with commercial banks combined to set up a formal futures exchange and the South African Futures Exchange (SAFEX) exchange was eventually formed and opened for business on 30 April 1990. The Johannesburg Stock Exchange’s equity derivative section began operating in 1990 facilitating the trading of financial derivatives to the open market (Adelegan, 2009). Options’ ...view middle of the document...
Warrants resemble options and therefore the concepts applied are the same. When the warrant is exercised the company issues new shares of stock, so the number of outstanding shares increases. There are two major types of warrants which are call and put warrants. Call warrants represent the right to purchase the underlying asset or the specified price also known as exercise price before or on the expiration date. Call warrants are therefore ideal for short term trading instruments because they can be traded without the need to exercise the underlying asset. The holder of a call warrant would make a profit if the stock price rises above the exercise price. Put warrants represent the right of the warrant holder to sell the underlying share at the specified price on or before the expiration date. If the stock price is lower than the exercise the holder of the put warrant would make a profit.(Hirsch, 2009).
Types of warrants traded on the JSE.
Vanilla Call and Put Warrants.
Vanilla call and put warrants are traded on the shares of a single company and they are one of the most popular warrants traded. If exercised they are settled by delivery of the underlying share or by cash settlement. Vanilla warrants can be American style or European style.(JSE,2007)
These are warrants that based on the level of a specific index and investors in these warrants will benefit from the movement in the market or sector rather than the movement of single shares. Index warrants are usually settled by means of cash payments and this settlements value is calculated by using an index multiplier that the issuer assigned when the warrant was first issued.(JSE, 2007)
A Basket warrant is made up of a collection of shares from a group of companies as the underlying shares. Investors benefit from the performance of a select group of companies or even a particular industry.(JSE,2007)
Discount warrants are in actual fact note structures and they are traded on the Investment Product sector of the JSE. These warrants allow the investors to buy the underlying security at a discount to the current market price, however the investor will forfeit participation in some of the upward market movement of the asset for this benefit.(JSE,2007)
Capital Protection Warrants.
These warrants guarantee the investors a specified return on the underlying asset, but the investor can also gain if the value of the assets increases above the capital protection level.(JSE,2007)
These warrants are very similar to conventional warrants except that they have a barrier level. The warrant will expire if the price of the underlying asset crosses the barrier level, that is it will completely disappear and the holder will have no right thereafter. The barrier level is set at the level where the warrant will have little value in any event. Barrier warrants are cheaper than other conventional warrants but yield the same profit and...