As our warrant market in Singapore is beginning to mature, more types of warrant are being introduced in SGX. Certificates are part of the warrant family. They serve investors who have a particular view and stand about current or near future market movement, and would want to take advantage of it.
Types of certificates currently available in SGX:
Participation certificates (or zero-strike certificates)
These certificates allow retail investors to buy into hard to access emerging markets (Vietnam, Turkey, etc) or themes like (luxury goods, commodities, etc). They usually track indexes and hence, it has high degree of diversification.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
- No leverage (gearing ratio = 1)
- Zero strike price eliminates the implied volatility factor, which is one of the 5 factors that affect warrant price.
- No time value decay and hence, can be held longer than structured warrants which have time value.
At the time of writing, only ABN Amro (AA) and Rabobank (RB) provide zero-strike certificates. Click here for more information.
As it suggests, you buy the certificate at a discount of the underlying price. The drawback is that there is a “cap strike” – the maximum profit you can get. Even if the underlying share continues to rise much more than the cap strike, you will not enjoy the upside profits. Discount Certificates are appropriate for those investors who think the market will remain flat or rise only slightly. At expiry, you will gain if the market price is higher than the discounted price that you paid for. If it is lower than the market price, you will lose the difference between market price and issue price. Currently, only Deutsche Bank offers discount certs. Click here for more details.
Daily Locked-in certificates
This is the most complicated cert of the 3 put forth in this post. Currently, only Rabobank offers this type of certificate. The certificates are issued in series tracking a basket of stocks. For example in Series 1, it consists of DBS, CapitaLand, SingTel and SIA. One has to note that the performance is taken collectively and not on a single stock.
There are 3 levels – Initial price level, Knock-out level (95% of initial price) and strike level
(88% of initial price). To get a locked-in profit for the day, the least performer in the basket of stocks must be above the strike level.
In addition, there are observation dates. At a particular observation day, if the least performer exceeds the knock-out level, the certificates will be terminated. Investors will receive the issue price plus any locked-in profits. Otherwise, the certificates will only be terminated at the expiry date.
For more details, click here.