A STUDY OF SOME WARRANTS LISTED ON THE STOCK EXCHANGE OF SINGAPORE

Abstract

A warrant is a spectacular financial instrument for investment which provides a good potential for leverage. Interest on warrants has been growing steadily as can be seen by an increase in the number of counters listed and the volume traded on the SES. The first part of the study attempts to evaluate the relative attractiveness of some warrants listed on the SES by applying some basic evaluation techniques. Though these indicators provide useful insight into the attractiveness of the warrants, personal judgement needs to be exercised in making a sound investment decision. Black-Scholes model has been widely adopted by academicians and practitioners in determining the theoretical value of the warrant. Risk-free rate of interest, stock dividend, stock volatility, possible dilution effect and others are commonly cited by researchers as the relevant factors that affect the price of a warrant. This study found that stock price changes account for most part of the variation in the warrant price. By applying simple valuation models, Giguere and Kassouf models, which stipulate the relationship between the stock and warrant prices, it was found that Giguere model is able to track the actual warrant price with remarkable reliability. Hence, the results cast doubt on the appropriateness of the Black-Scholes model in valuing local warrants. Evidence was also established that price changes of warrants are independent over the time span under study, thus supporting the claim that the market is weak form efficient. The results suggest that there is no role for technical analysis and no investors can earn excess returns by resorting to trading strategies based on historical price information.