Warrants

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What is a warrant?

An investor who is bullish on an index or a company's stock has two ways to invest in that company:

  • to buy the company’s stock directly: if the stock price rises by 20%, the investor will have earned 20% on their investment. 
  • to buy call options on that stock, which will provide the buyer with a high leverage on the upside, but a total loss of the investment on the downside.

The main advantage of an option is the leverage it provides, which amplifies the fluctuations of the underlying asset it covers. However, this market is usually reserved for financial professionals. So, non-professional investors wishing to trade in these products will not find them on the organized markets where they are used to trading. Moreover, options are traded on an over-the-counter (OTC) market and are derivative products, something that some investors cannot deal with. 

Therefore, the warrant has a double interest:

  • it is an option that is listed on a stock exchange, which means its value is known every day;
  • it is an equity security with an issuer which is subject to very specific regulations. Thus, they are identifiable securities in the same way as stocks and bonds, are listed on a stock exchange, and therefore have a price and an ISIN code. 

What are the main characteristics of warrants?

  • Issuer: warrants are not issued by the company that issued the shares. They are issued by financial institutions who create the option on the underlying share or index. The financial institution is therefore the seller of this option and the one that defines the characteristics of these warrants. 
  • Underlying: this is the specific asset to which the warrant relates. It can be a stock, an index, a commodity or a currency.
  • Premium: name given to the price of a warrant. To acquire a warrant, the investor pays this premium which is the value quoted on the stock exchange.
  • Exercise price: this is the price at which the investor can buy or sell the underlying asset at the expiration of the warrant. This price is determined at the time of issue of the warrant.
  • Parity: this represents the number of warrants needed to exercise the right on a given underlying. A parity of 10 on a call warrant on a share means that 10 call warrants need to be exercised at expiration in order to buy 1 share at the exercise price.