APPLE-C1 Call Warrant (CW)

OSK Investment Bank really knows how to pick the stock especially when comes to list call warrants (CW) of American stocks. After listed Google Inc.’s (Nasdaq: GOOG) CW (GOOGLE-C1) recently, on 11th December, it listed Apple Inc.’s (Nasdaq: AAPL) CW as APPLE-C1 (stock-code 0528C1) on the Bursa Malaysia.



Apple-C1 has the following characteristics which you should know:

• Conversion / Exercise Price = USD171.50
• Conversion / Exercise Ratio = 1200
• Expiry Date = 3rd July 2008
• IPO Price = RM0.11

You should notice the variable or the unknown fluctuation from the above items namely the exercise price that is denominated in US dollars. The US dollars had weaken since the last interest rate cut and if Ben Bernanke continues to cut the interest rate in the foreseeable future, you can expect the Malaysia Ringgit to strengthen further.

The exchange rate for USD to Ringgit was 1 USD to RM3.3120 as of Dec 13. This means the following:

• Conversion / Exercise Price: USD171.50 x 3.3120 = RM568.01
• Apple-C1 trading price as of 13th Dec 2007 (midday closing) = RM 0.115
• Let’s exercise the CW: RM0.115 x 1200 = RM138
• Add it to the Exercise Price: RM568.01 + RM138 = RM706.01

Now, let’s see the last stock price of Apple Inc. traded at Nasdaq on Dec 12. The share closed at USD190.86 per share which will translate into RM632.13 ($190.86 x 3.312). So you’re paying a premium of 11.69 percent or RM73.88 for the time value until 3rd July 2008. Now, let’s assume the premium of 11.69 percent and currency exchange rate will stay the same until the expiry date, although it’s very unlikely. It’s for computation sake.

If Apple Inc. climbs to USD200.86 (USD10 gain) you’ll have the following:

• In Ringgit: USD200.86 x 3.312 = RM665.25
  
• The total exercise price and ratio= RM743.02 (11.69% premium)
• The un-exercise 1200 CWs: RM743.02 – RM568.01 = RM175.01
• Each CW: RM175.01 / 1200 = RM0.146 (round to RM0.145 since you can only trade at 0.005 spread)
  

So, when the Apple Inc. stock jumps US$10 a share, your gain in CW is RM0.03 (around 26% gain). The underlying mother share of Apple Inc. only gain at around 5.24% (From USD190.86 to USD200.86). Of course the above illustration is based on the assumption that the premium and currency exchange rate remains static at the above figures.

Surely, one could probably make more money trading Call or Put Options directly from the U.S. stock markets mainly due to the volatility and one-to-one relationship between the stock and the options, i.e. no huge conversion ratio and exchange rate risk.

Also worth mentioning here, U.S. call and put options are automatically priced using Black-Scholes-Merton model, whereas the price of local structured CW like Apple-C1 are based on demand and supply of the CW.

*Adapted from Stocktube with some minor updates.