I bought a call warrant linked to the underlying stock with an expiry date of late April. Why did the call warrant trade below its intrinsic value with a negative premium of 1% in mid-March? This seemed unreasonable as the warrant price should at least be equal to its intrinsic value, i.e. the excess of the prevailing market price of the underlying stock over the exercise price of the call warrant.

While in most cases a warrant does trade above its intrinsic value, this does not mean that the intrinsic value must be the minimum value of a warrant. As explained below, it is possible for a warrant to trade below its intrinsic value.

Holding a call warrant differs from holding the underlying stock, especially since the holders of the call warrant are not entitled to receive any dividends that might be declared by the underlying stock. In this particular case, the underlying stock was due to announce its annual results in late March. Based on practices in previous years, the underlying stock is likely to go ex-dividend in mid-April. With an expiry date for the call warrant in late April, the market price of the underlying stock would be the ex-dividend price in determining the payout of the call warrant on that expiry date. This would result in a lower payout to call warrant holders than it otherwise should. Although the final dividend that the underlying stock would declare was still unknown in mid-March, it was widely anticipated that the dividend would be no less than $1.5. It was not unreasonable for potential investors and the liquidity provider to deduct the dividend element when pricing the call warrant.