Characteristic Of Warrants And Its Technical Jargon

Published by slang March 18th, 2008 in Personal Finance

Features Of Warrants:-

Warrants are securities issued by a company which give the holders the right to purchase shares in the company at a specific price at a specific date in future.
Warrants are tradable and the value will go up and down as the price of the shares to which they relate(the underlying share or mother share) goes up and down
Warrants have no right to dividend and no voting rights.
Warrants are issued by companies as sweeteners in a bond/rights/loan stock issue.

Terms used when trading warrants:

Out of the money:

if the underlying share price is below the exercise price, the warrants are out of the money and are deemed worthless

In the money:

if the share price rises above the exercise price, they are in the money and worth something

Premium:

measures the amount(in%) an investor is willing to pay for a warrant in excess of the market value of the underlying security to enjoy the returns by buying the warrant
premium=
(warrant price +exercise price)-(underlying share price)/underlying share price

Gearing:

measures the ratio(or units) of warrants one can purchase with an investment in the underlying security or mother share. It is a ratio of mother share price over warrant price (gearing=underlying share price/warrant price)

Expiry date:

after this date, the warrant holder loses the rights to purchase or sell the underlying security.

Exercise price:

the predetermined price that the warrant holder is entitled to purchase or sell the underlying security

Exercise ratio:

The number of warrants required to exercise into one share of the underlying security

Historical volatility:

is a figure derived from the price action of the underlying security using statistical calculation

Implied Volatility:

is a figure derived from warrants pricing formula when we input the current warrant price and work backwards to deriv the (implied) volatility figure. It represents current market expectations of the futur volatility of the underlying security

Delta:

represents the magnitude of the warrants price movement in theory in response to movement in underlying share price
Delta=change in warrant price/change in underlying share price

Effective gearing:

is a more accurate measure of a warrant’s gearing. It adjusts for the Delta of the warrant.

Call Warrant:

Holders of warrants have the right,but not obligaion, to buy the underlying share(or security) from the issuer for a particular price at a future date based on terms of issue or to receive cash settlement based on the underlying share price and exerciseprice of the call warrant

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