In calculating warrants based on underlying assets such as stocks and stock indices, variables such as the underlying asset price, exercise price, number of days to maturity, volatility, interest rate, and dividend expectations are used. Investors should be aware of the potential effects of dividend payments on warrants based on stocks and stock indices, especially when dividend payments on stocks begin.
Under normal conditions, warrants are priced taking dividend expectations into account. The dividend effect is included in the warrant price. Thus, dividend-related price movements in the underlying asset on dividend payment dates do not cause changes in the value of call and put warrants. As stated in the relevant Capital Markets Instrument Note, ordinary cash dividends do not require adjustments in warrants.
On the other hand, changes in dividend expectations after warrants begin trading may cause both upward and downward changes in warrant prices. Assuming other variables remain constant, typically, the cancellation of an expected dividend within the maturity period or the announcement of a dividend lower than expected may increase the price of call warrants while decreasing the price of put warrants. An unexpected dividend announcement by the underlying asset during the maturity period or an announced dividend that is higher than expected may decrease the price of call warrants and increase the price of put warrants. Dividend announcements are normally made before the dividend payment date. If the dividend amount and payment schedule are close to expectations in terms of level and timing, no impact on the warrant price should be expected during the announcement period.
In addition to the dividend amount, the date on which the dividend will be paid is at least as important as the dividend amount.
For example, consider a scenario where all dividends for an ABC stock have historically been paid in May, with a dividend payment of 1 TRY each year. Again, consider that call and put warrants with the same absolute delta value, maturing in March, April, and May, are traded using this stock as the underlying asset. While the issuer's dividend expectation is reflected as 1 TRY in the pricing of May warrants based on historical data, dividends are not included in the pricing of March and April warrants because dividend payments are expected after the expiration date of March and April warrants. In this case, the prices of the warrants are scenarioed as shown in the table below:
Warrant | Maturity | Type | Multiplier | Expected Dividend | PY Purchase Price | PY Selling Price |
|---|---|---|---|---|---|---|
ABCAA | 03/31/21 | Call | 1 | 0.00 | 0.20 | 0.22 |
ABCPA | 03/31/21 | Sale | 1 | 0.00 | 0.20 | 0.22 |
ABCAB | 04/30/21 | Purchase | 1 | 0.00 | 0.40 | 0.42 |
ABCPB | 04/30/21 | Sale | 1 | 0.00 | 0.40 | 0.42 |
ABCAC | 05/31/21 | Purchase | 1 | 1.00 | 0.60 | 0.62 |
ABCPC | 05/31/21 | Sale | 1 | 1.00 | 0.60 | 0.60 |
In an environment where ABC company unexpectedly announced that its dividend payment would be 0.50 TRY per share and that this payment would be made in mid-April, an update to the dividend amounts used in the issuer's warrant pricing is expected. In this scenario, without any change in the underlying asset price, the updated dividend parameter following the company's announcement may result in the following change in warrant prices:
Warrant | Maturity | Type | Multiplier | Declared Dividend | PY Purchase Price | PY Selling Price | Change |
|---|---|---|---|---|---|---|---|
ABCAA | 03/31/21 | Purchase | 1 | 0.00 | 0.20 | 0.22 | 0% |
ABCPA | 03/31/21 | Sale | 1 | 0.00 | 0.20 | 0.22 | 0% |
ABCAB | 04/30/21 | Purchase | 1 | 0.50 | 0.15 | 0.17 | -61% |
ABCPB | 04/30/21 | Sale | 1 | 0.50 | 0.65 | 0.67 | 61% |
ABCAC | 05/31/21 | Purchase | 1 | 0.50 | 0.85 | 0.87 | 41% |
ABCPC | 05/31/21 | Sale | 1 | 0.50 | 0.35 | 0.37 | -41% |
As stated in the scenario, warrant prices may fluctuate independently of the underlying asset's price. Following such a price change, it should not be expected that warrant prices will move in response to the price movement of the underlying asset on the dividend payment date, proportional to the dividend amount.
Investors should take into account the effects of dividend expectations on warrant prices, especially in stocks with high dividend yields and during dividend payment periods.
