Debt Dictionary

Warrants

Investment Dictionary -> Warrants

The warrant gives purchasers the right, on a specific date and at a fixed price, to purchase a stock. It is a financial security in nature. Similarly to stocks, they can be bought or sold on the market. The individuals who hold them do not collect income but instead, expect to profit from the difference between the sale and the purchase price.

Warrants are frequently added to a proffered stock or to bonds in order to make them more desirable. In essence, this financial instrument allows the issuer to lower the interest rate to be paid. The profit from the bond can be enhanced, thus making the bonds more attractive to the eventual buyers. Private equity deals can also employ bonds. As an option, these warrants can be sold independently from the bond. Deutsche Borse and Hong Kong are actively trading them.

Warrants types rage widely. There may be different reasons behind the choice to invest in one type of warrant than in another.

- Equity warrants can be put warrants or call warrants. The underlying security can be bought with call warrants, while the put warrants gives one the right to sell.

- The covered warrants come with some backing. The issuer is obliged to purchase the stock beforehand or other instruments must be used for covering the option.

- Basket warrants mirror the industry’s performance. As with regular indexes, warrants, for instance, can be classified on an industry level.

- Index warrants use an index. They disperse the risk using index put and index call warrants.

Theoretically there are various methods to value warrants. These include the evaluation model called the Black-Scholes. It is important in understanding the influence of warrant prices.

The warrant’s market value is comprised of two components: the intrinsic value and the time value. The first merely reflects the difference between the underlying stock price and the exercise price.


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