6

Consider these two warrants. Both have the same underlying stock and the same exercise price, but still they have different fair value, and different stock price. Why? Especially I do not understand why the fair value is shown differently. Can someone explain this?

  • Underlying stock: Infineon Technologies AG (symbol: IFX)
  • Current stock price: 24.52 EUR
  • Warrant exercise price: 23.80 EUR
  1. JP Morgan Call 23.8 IFX 18.09.2020 (ISIN: DE000JC1JE71)

    • Last trading date is Sep 17, 2020
    • Fair Value is shown as 0.49 EUR, and stock price is 0.60 EUR
  2. JP Morgan Call 23.8 IFX 18.12.2020 (ISIN: DE000JC1G474)

    • Last trading date is Dec 17, 2020
    • Fair Value is shown as 1.33 EUR, and stock price is 2.17 EUR
16

The 'time value' of an option, or a warrant with an expiry date, or anything that gives you certain rights for some period of time, is based on 2 things:

(1) Regular time value of money:

If I have the right to buy a share of APPL for $114, {current market price is $114}, and I can wait a year before I exercise that right, then for the next year, I can take that same $114 I need to exercise it, and I could invest it in other things. Even just investing at a low-risk 1% interest earning account as an example, means I could earn an extra $1.14, so the total value of the option is increased by at least that risk-free earnings rate over the period up to expiry. This means if a warrant has an expiry date of only 1 day, it's value should be lower by at least that $1.14, because to exercise it you would need to put cash out today, and can't earn the extra risk free investment income.

(2) The value of risk-reduction gained by deferring your decision on whether to exercise:

Assume I can buy a share of AAPL for $114, or I can buy an option that gives me the right to buy it for $114 at some point over the next year. If I own the option, and the price goes up to $120, then perfect - I can exercise the option, pay $114, and get a share worth $120. If it goes down to $110, then no problem - I would choose to not exercise the option, and my loss is equal only to the price of buying the option in the first place.

The longer you can wait before exercising, the more you are able to defer making a decision, which means your risk goes down. If I have an option to buy AAPL for $120 that expires tomorrow, it is almost worthless - because it would be very rare for AAPL to increase above $120 in just 1 day. If I have an option to buy AAP for $120 that expires in a year, it would have good value - because a 5% increase in value in 1 year could be very possible.

  • Thanks, that's a great answer! It gives a new light on the relation between time and price of an option resp. warrant. – askolotl Sep 14 '20 at 16:13
5

Warrants are like options. They have a market price and a premium which decreases as time passes. The longer the time until the expiration, the greater the price.

  • okay, and why is the fair value different? – askolotl Sep 14 '20 at 14:55
  • 2
    The fair value may include the time value. Intrinsic value would exclude the time value. – Chris W. Rea Sep 14 '20 at 15:23
  • 1
    @askoloit - It's the same answer. A pricing formula is used to determine the fair value of options and warrants. The inputs are the price of the underlying, the exercise price, the time remaining, etc. If all variables are equal except for the time remaining then the one with the more time remaining until expiration will have a higher market price as well as a higher fair value. – Bob Baerker Sep 14 '20 at 15:56
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    @Chris W. Rea - Essentially, warrants are quite similar to options. Fair value is based one's volatility assumption. Since these warrants are traded in EUR, I'm assuming that it's no different across the pondf. – Bob Baerker Sep 14 '20 at 16:03
1

As you've noted yourself, they have different maturity dates. All else equal, that should explain the price difference. Intuitively, a lot can happen between September and December, e.g. US elections.

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