- Economy & Finance
2. What are we going to cover here? What is a warrant? The main elements of a warrant The business model of the issuer How do they make the profit? Isnt there a bit of a problem of conflicting interests? 3. What is a warrant? A warrant is an investing instrument similar to an option in the sense that it gives the holder the right but not the obligation to buy an underlying security at a certain price, quantity and future time. It is unlike an option in that a warrant is issued by a company, whereas an option is an instrument of the stock exchange. The underlying asset could be a commodity, an index, a currency or an equity. There are call warrant and put warrant. A call warrant gives the investor the right to buy the intrinsic asset. A put warrant gives the holder the right to sell the underlying security. 4. The main elements of a warrant The strike price, that is the value at which the holder of the warrant can buy (call) or sell (put) the intrinsic asset. The premium, or the cost of the warrant: It means how much an investor has to pay in order to buy the warrant. The leverage or the conversion ratio: it means how many stocks (for instance) you are exposed for each warrant you have bought. The expiration date 5. The business model of the issuer In this presentation, I am going to overlook the Greek lettersand whatever other inputs an investor may have intoaccount before using these products. What I am trying is to think from the issuers perspective. I mean, every time a company decides to launch a service ora product is because the company is expecting to get aprofit. In the case of warrants of course is the same. So that, get in mind that the company selling warrants is thinking of making a profit. 6. How do they make the profit? The only way is throughout the cost of each warrant, the premium an investor pays in order to receive the right of holding the product. An investor will make a profit in different ways if he has bought a call warrant or a put warrant. To simplify the example lets focus only on call warrants. In that situation, an investor will make a profit if the value of the underlying asset at a certain time (lets imagine the expiration date) is higher the strike price. Eventually, something that is going to happen always is that the issuer will have to pay to the investor every time the price has surpassed the strike price. To summarize: the issuer receives the income of the selling of the warrants. At the expiration date, the company will have to pay to the holder only if the prices have favored the position of the investor. 7. Conflicting interests? What does it mean? We have been told that the premiums (or the price an investorhas to pay to buy a warrant) are decided by followingcomplicated mathematical procedures. Of course, I think itis in that way.However, think about it: the source of their profit is themoney they make thanks to those premiums, and at thesame time, thanks for not having to pay to the investorsevery time the expiration date arrives.But, if this is true, why are these companies giving advicetoinvestors? I mean, they settle the price and choose theassets and strike prices in order to make a profit. If at theend of the life of the warrant the investor has made theright decision, the company will face a loss. Isnt there a bit of a problem of conflicting interests?
- 1. Warrants: The business model of the issuer. In this presentation, I am going to overlook the Greek letters and whatever other inputs an investor may have into account before using these products.What I am trying is to think from the issuers perspective. By Jorge Cidjorge.firstname.lastname@example.org