Implied volatility and warrant issuing strategies : evidence from the Johannesburg Stock Exchange

Koorts, Thorpe Thomas (2002-12)

Thesis (MBA)--Stellenbosch University, 2002.

Thesis

ENGLISH ABSTRACT: Increased uncertainty in global markets has compelled modern investment and portfolio management to tailor specific financial outcomes. Investors can incorporate derivative instruments into their portfolios to hedge their positions against uncertainty, obtain exposure to virtually any risk or obtain current exposure for future income. Warrants are such instruments; it tracks its underlying asset as options and are tailored for smaller and private investors. It could, however, also be dangerous to one's financial health if the finer intricacies are not understood. Warrants take the investment industry to a new level, because it is essentially a retail product. Warrant issuers hedge a position in assets or on derivative exchanges at a 'wholesale' price and then short the position in small contracts on the stock exchange at a 'retail' price. The price difference presents itself in the volatility parameter used to calculate the issuing price of the warrant. Once issued, the issuer maintains influence on the price by exerting either supply or demand through maintaining a bid and offer in the market. Often, issuers use this 'market-making' to steer the instrument price towards a lower volatility parameter at the expiry of the warrant when it is neutralised, thus securing profit to the issuer. Traditionally financial institutions would market their services in managing assets. They now flex muscles in marketing a retail product through issuing warrants as well. Fierce competition exists among issuers with low cost and differentiated strategies identifiable. These strategies could persuade an investor towards a particular warrant, which might not necessarily be the best investment from the investor's viewpoint. This erodes the efficiency of the market.

AFRIKAANSE OPSOMMING: Toenemende onsekerheid op wêreldmarkte noodsaak hedendaagse beleggingsbestuur om spesifieke finansiele resultate te verseker. Beleggers kan afgeleide instrumente in portefeuljes gebruik om teen onsekerheid te verskans of blootstelling te verkry. Sekuriteitsregte is 'n populêre instrument vir private beleggers. Dit word uitgereik deur finansiele instellings en volg die pad van 'n onderliggende bate, soos 'n opsie. Vanweë die intrede van 'n middelman, hou hierdie instrumente egter addisionele risiko in. Sekuriteitsregte kan beskryf word as 'n kleinhandelsproduk. Kontrakskrywers neem lang posisies in bates of op die afgeleide beurs in, teen groothandel pryse en verkans kort posisies in klein kontrakte op die sekuriteitsbeurs om sodoende 'n neutrale posisie te handhaaf. Die prysverskil manifisteer as 'n volatiliteits maatstaf van die onderliggende bate. Na uitreiking beïnvloed die onderskrywers die prys deur die vraag en aanbod op die mark te manipileer. Hierdie invloed kan gebruik word om die kontrakprys na 'n laer volatiliteitsvlak te stuur voor die kontrak verstryk, sodat addisionele wins gewin kan word. Finansiële instellings bemark hul dienste tradisioneel as batebestuurders. Hul besigheid word egter nou uitgebrei deur handelsprodukte ook te bemark. Sterk kompetisie bestaan tussen onderskrywers met lae koste of gedifferensieerde strategieë identifiseerbaar. Beleggers se keuses word dikwels deur hierdie strategiese bemarking beïnvloed, eerder as om op finansiele toepaslikheid te fokus. Dit lei tot die gevolgtrekking dat die mark nie volkome voltreffend is nie.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/52883
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