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

Abstract

There has been a number of studies made to test the validity of different models on local warrants. This study focuses on 13 of the more actively traded warrants from various sectors listed on the SES. The study is an attempt to determine if these warrants have been priced accurately as suggested by efficient-pricing theories on warrants. In particular, the Black-Scholes Option Pricing Model, modified for use with warrants, is used to price the selected warrants. As suggested by previous authors, we use the implied volatility to test the applicability of the Black-Scholes Pricing Formula. This study supplements the pricing accuracy investigation undertaken by others in the past. The relevance of having a price prediction model for an investor is looked into. With the increased activity and liquidity in the warrant market, the market would always have its own fair market price. In this regard, can the average investor who is only a price taker make use of some pricing models as a form of investment strategy? This is investigated in the study. Given the increased interest in the derivative securities, this would be an interesting and exploratory endeavour. Using the Black Scholes Option Pricing Model with implied volatility, we find that the local warrant market has been fairly priced. However when we compare the various trading strategies, we are not able to establish any superior trading strategy that can generate a reasonable return for the investor. This is probably due to the overall downward trends of the markets (both stocks and warrants).