Price Calculation
Since the price of a turbo warrant behaves like a future contract (plus the barrier), we could say that a turbo is expensive or not related to its future contract.
Example:
Time 1 year
Benchmark interest rates at 2%
Stock ACME current price $10 dividend 5%
Future contract (1 year)=10-(0.05*10)+(0.02*10)= $9.7
Turbo CALL 1 year parity 1:1 strike at $9 and bid-ask prices:0.98-1 ->related price=9+1=$10
After 1 year (d=dividend):
| $8 | $10 | $12 | |
|---|---|---|---|
| Stock | 8+d-10=-1.5 | 10+d-10=+0.5 | 12+d-10=+2.5 |
| Future | 8-9.7=-1.7 | 10-9.7=+0.3 | 12-9.7=+2.3 |
| Turbo | 8-10=-2 | 10-10=+0 | 12-10=+2 |
Comments:
- If you don't want to be leveraged, buy the stock
- If you just want to be leveraged, buy the future
- If you want to be leveraged, don't want to rollover quarterly the future(+spreads+commissions) and don't want to wait for a margin call, use the turbo warrant
Read more about this topic: Turbo Warrant
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