Investment Trust Warrants

Investment trust warrants are call options on the underlying Investment trusts usually issed with a very long life (e.g. several years) and a strike-price the same as the IT launch price. Investment trusts usually trade at a discount, so prices generally fall after launch until the net-asset value of the company has increased above the launch price. The warrant is tradable and its value is determined by market forces, but on exercise at the end of it's life it will be worth the difference between the share price on that date and the strike-price (i.e. the gain in the share-price over that period)

There are very few sources of information concerning investment trust warrants, but the best web-site is probably TrustNet This gives a useful table of all of the remaining warrants and their prices, strike prices etc.

The value of IT warrants can be determined using normal option-pricing methods (e.g. Black Scholes option pricing - see module below and My separate option pricing article) based on length of time to maturity and share price, but the above table gives the current market price. The simple way to approximate the value of the warrant is to consider the following.

Is the share price above the strike price ("In the money")

Is the share price below the strike price ("Out of the money")

If not, what is the chance of the price rising to the strike price

If the price remain below the strike price the warrant is worthless

If the price rises by x% how much will the value of the warrant increase?

Here are the investment trust warrants currently available (at time of writing) and the date on which they can be exercised (if available):

ABERDEEN ASIAN INCOME (31 May 2013)

ABERDEEN ASIAN SMALLER COMPANIES INVESTMENT TRUST PLC (30 Nov 2010)

BLUE PLANET FINANCIALS GROWTH & INCOME (31 July 2010)

CITY NATURAL RESOURCES HIGH YIELD (31 Oct 2009)

FINSBURY WORLDWIDE PHARMACEUTICAL TRUST (31 July 2009)

HENDERSON OPPORTUNITIES TRUST (15 Feb 2014)

IMPAX ENVIRONMENTAL MARKETS (15 June 2010)

JP MORGAN INDIAN IT PLC

JUPITER GREEN IT PLC (31 July 2011)

MIDAS INCOME & GROWTH TRUST (31 Aug 2010)

NEW INDIA IT (30 June 2010)

PERPETUAL INCOME AND GROWTH INVESTMENT TRUST PLC

RCM TECHNOLOGY TRUST PLC

SR EUROPE INVESTMENT TRUST PLC

The Black Scholes option pricing Model:

C=SN(d1)-Ke^(-rt)N(d2)

C=Theoretical Call Premium
S=Current Stock Price
t=time until option expiry
K=option strike price
r=risk-free interst rate
N=cumulative standard normal distribution
e=expoential term (2.7183)
d1=(ln(S/K)+(r+s^2/2)t)/sSQRT(t)
d2=d1 - sSQRT(t)
s=standard deviation of stock returns

Assumptions:

1) The stock pays no dividends
2) European exercise terms are used (option can only be exercised on the expiration date)
3) Markets are efficient.
4) No commissions are charged
5) Interest rates remain constant and known
6) Returns are lognormally distributed

For a full description of how this is derived and a simple explanation see this article...