How currency fluctuations can affect warrant prices - foriegn derivitive

How currency fluctuations can affect warrant prices 23 Mar 16	[You must be registered and logged in to see this image.]	Share
A warrant’s price is typically determined by 6 main factors: the share price and its distance from the exercise price, the time to expiry, the implied volatility, and to a lesser extent interest rates and dividends. For warrants over foreign underlyings, there is another factor to consider, the exchange rate (or FX). Currently in Malaysia, Macquarie have warrants listed over two foreign underlyings, the Hang Seng Index (HSI) and the China A50 (A50). Which means that warrants over these indices will be affected by movements in the Hong Kong Dollar (HKD) and US Dollar (USD) respectively. As the warrants are denominated in Malaysian Ringgit, it means that an increase in either of the HKD or USD, would result in an increase in the HSI or A50 warrants, all other things being equal. Whereas a decrease in either of these currencies would result in a decrease in the warrants, denominated in Malaysian Ringgit. Lets look at an example, for a call warrant over the HSI, the value of the warrant (in Malaysian Ringgit) at expiry is determined by the following formula. This is simply the standard call warrant expiry formula, multiplied by the exchange rate.. [You must be registered and logged in to see this image.] If the HKD/MYR exchange rate were to increase, the value of the warrant would increase. If it were to fall, the value of the warrant would fall. To use a recent real life example, on Tuesday 22 March we which saw a large move in the HKD/MYR exchange rate, where it fell 1.2% to 0.5172, this led to a fall in the prices for all HSI warrants. Looking at one warrant in particular: Underlying Futures: 20,600 Exercise Level: 17,600 Exercise Ratio: 900 to 1 A HKD/MYR FX change from 0.5235 to 0.5172 will see the warrant settlement amount decrease from RM1.7450 to RM1.7240, a drop of 1.2%, in line with the currency change, assuming all else constant. The opposite is also true, when the HKD/MYR FX strengthens it will lead to an increase in the warrant price. For further clarifications on this topic, please do not hesitate to contact us at [You must be registered and logged in to see this link.] or 03 2059 8840.

How currency fluctuations can affect warrant prices - foriegn derivitive

How currency fluctuations can affect warrant prices - foriegn derivitive

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