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This Article is About a Security

This Article is About a Security

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Published by: yazad_07 on Oct 16, 2009
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This article is about a security. For other uses, see Warrant .
warrant
is asecuritythat entitles the holder to buy stock of the companythat issued it at a specified price, which is usually higher than the stock price at time of issue.Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing theissuer to pay lower interest rates or dividends. They can be used to enhance the yieldof  the bond, and make them more attractive to potential buyers. Warrants can also be usedin private equitydeals. Frequently, these warrants are detachable, and can be soldindependently of the bond or stock.Warrants are actively traded in some financial markets such as Deutsche Börse and HongKong.[1]In Hong Kong Stock Exchange, warrants accounted for 11.7% of the turnover in the first quarter of 2009, just second to the callable bull/bear contracts.[2]
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[edit] Structure and features
Warrants have similar characteristics to that of other equity derivatives, such as options,for instance:
 
Exercising: A warrant is exercised when the holder informs the issuer their intention to purchase the shares underlying the warrant.The warrant parameters, such as exercise price, are fixed shortly after the issue of the bond. With warrants, it is important to consider the following main characteristics:
Premium: A warrant's 'premium' represents how much extra you have to pay for your shares when buying them through the warrant as compared to buying themin the regular way.
Gearing (leverage): A warrant's 'gearing' is the way to ascertain how much moreexposure you have to the underlying shares using the warrant as compared to theexposure you would have if you buy shares through the market.
Expiration Date: This is the date the warrant expires. If you plan on exercising thewarrant you must do so before the expiration date. The more time remaining untilexpiry, the more time for the underlying security to appreciate, which, in turn,will increase the price of the warrant (unless it depreciates). Therefore, the expirydate is the date on which the right to exercise no longer exists.
Restrictions on exercise: Like options, there are different exercise typesassociated with warrants such as American style (holder can exercise anytime before expiration) or European style (holder can only exercise on expiration date).
 Warrants are longer-dated options and are generally tradedover-the-counter.
[edit] Secondary Market
Sometimes the issuer will try to establish a market for the warrant and to register it with alisted exchange. In this case, the price can be obtained from a broker .But often, warrants are privately held or not registered, which makes their prices less obvious. Warrants can be easily tracked by adding a "w" after the company’s ticker symbolto check the warrant's price. Unregistered warrant transactions can still be facilitated betweenaccredited parties, and in fact several secondary markets have been formed to provideliquidity for these investments.
[edit] Comparison with call options
Warrants are much like call options, and will often confer the same rights as an equityoption and can even be traded in secondary markets. However, warrants have several keydifferences:
Warrants are issued by private parties, typically the corporation on which awarrant is based, rather than a publicoptions exchange.
 
Warrants issued by the company itself are dilutive. When the warrant issued bythe company is exercised, the company issues new shares of stock, so the number of outstanding shares increases. When a call option is exercised, the owner of thecall option receives an existing share from an assigned call writer (except in thecase of employee stock options, where new shares are created and issued by thecompany upon exercise). Unlike common stock shares outstanding, warrants donot have voting rights.
Warrants are considered over the counter instruments, and thus are usually only traded by financial institutions with the capacity to settle and clear these types of transactions.
A warrant's lifetime is measured in years (as long as 15 years), while options aretypically measured in months. Even LEAPS (long-term equity anticipationsecurities), the longest stock options available, tend to expire in two or threeyears. Upon expiration, the warrants are worthless unless the price of the commonstock is greater than the exercise price.
Warrants are not standardized like exchange-listed options. While investors canwrite stock options on theASX(or CBOE), they are not permitted to do so with ASX-listed warrants, since only companies can issue warrants, and while eachoption contract is over 1000 underlying ordinary shares (100 on CBOE), thenumber of warrants that must be exercised by the holder to buy the underlyingasset depends on the conversion ratio set out in the offer documentation for thewarrant issue.
[edit] Types of Warrants
A wide range of warrants and warrant types are available. The reasons you might investin one type of warrant may be different from the reasons you might invest in another typeof warrant.
Equity Warrants: Equity warrants can be call and put warrants.
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Call warrants give you the right to buy the underlying securities
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Put warrants give you the right to sell the underlying securities
Covered Warrants: A covered warrant is a warrant that has some underlying backing, for example the issuer will purchase the stock before hand or will useother instruments to cover the option.
Basket Warrants: As with a regular equity index, warrants can be classified at, for example, an industry level. Thus, it mirrors the performance of the industry.
Index Warrants: Index warrants use an index as the underlying asset. Your risk isdispersed—using index call and index put warrants—just like with regular equityindexes. It should be noted that they are priced using index points. That is, youdeal with cash, not directly with shares.
[edit] Traditional

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