finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...

a covered warrant (sometimes called naked warrant) is a type of warrant that has been issued without an accompanying bond or equity. Like a normal warrant, it allows the holder to buy or sell a specific amount of equities,

currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...

, or other

financial instrument Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership, interest in an entity or a contractual right to receive or deliver in the form ...

s from the issuer at a specified price at a predetermined date. Unlike normal warrants, they are usually issued by

financial institution A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...

s instead of share-issuing companies and are listed as fully

tradable securities Liquid tradable securities (or LTS) is a generic phrase for a wide range of financial instruments. It often differentiates financial instruments that are easily tradable (or tradeable) as opposed to those that require the permission of the company ...

on a number of

stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for ...

s. They can also have a variety of

underlying In finance, a derivative is a contract between a buyer and a seller. The derivative can take various forms, depending on the transaction, but every derivative has the following four elements: # an item (the "underlier") that can or must be bou ...

instruments, not just equities, and may allow the holder to buy or sell the underlying asset. These attributes make it possible to use covered warrants as a tool to speculate on financial markets.

Structure and features

A covered warrant gives the holder the right, but not the obligation, to buy ("

call Call or Calls may refer to: Arts, entertainment, and media Games * Call (poker), a bet matching an opponent's * Call, in the game of contract bridge, a bid, pass, double, or redouble in the bidding stage Music and dance * Call (band), from L ...

" warrant) or to sell (" put" warrant) an underlying asset at a specified price (the "strike" or "exercise" price) by a predetermined date. The price paid for this right is the "premium" and with covered warrants, you cannot lose more than this initial premium paid. They are

limited liability Limited liability is a legal status in which a person's financial Legal liability, liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company, or joint venture. If a company that provides limi ...

instruments so there are no further payments or

margin call ''Margin Call'' is a 2011 American drama film written and directed by J. C. Chandor in his feature directorial debut. The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the ...

s required to maintain a covered warrant position. Covered warrants offer a flexible alternative to private investors who seek to gain the leverage benefits of derivatives, but who wish to limit their risk. When the issuer sells a warrant to an investor, they typically "cover" (or

hedge A hedge or hedgerow is a line of closely spaced (3 feet or closer) shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate ...

) their exposure by buying the underlying instrument in the market. Covered warrants have an average life of 6 to 12 months, although some have maturities of several years. In contrast to "traditional" equity warrants, with covered warrants, no new issuance of

common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other C ...

occurs if the warrant is exercised. The underlying shares of common stock are usually either owned by the issuer of the covered warrants or the issuer has a mechanism, such as owning equity warrants for the underlying shares, through which they can obtain the shares. Covered warrants are very popular due to the following qualities: * Low cost * Flexibility * Limited liability * Multi-strategy options

Comparison with options

Covered warrants are very similar to options—much more so than "traditional" warrants. This is because covered warrants, just like options, can be created to allow holders to benefit from either rising prices or falling prices, by having both put and call warrants. They can also be created on a wide variety of underlying instruments, not just equities and they are fairly standardised and are mostly traded on exchanges. The main difference is that warrants tend to have longer maturity dates, typically measured in years instead of months (as with options), and are easier to access for individuals as they can be bought and sold in the same way as shares in the stock exchange.

Trading warrants

Warrants are listed on a number of major exchanges, including the

London Stock Exchange The London Stock Exchange (LSE) is a stock exchange based in London, England. the total market value of all companies trading on the LSE stood at US$3.42 trillion. Its current premises are situated in Paternoster Square close to St Paul's Cath ...

Singapore Exchange Singapore Exchange Limited (SGX Group) is a Singapore-based exchange conglomerate, operating Equity (finance), equity, fixed income, currency and commodity markets. It provides a range of listing, trading, clearing, settlement, depository and ...

, and

Hong Kong Stock Exchange The Stock Exchange of Hong Kong (, SEHK, also known as Hong Kong Stock Exchange) is a stock exchange based in Hong Kong. It is one of the largest stock exchanges in Asia and the List of major stock exchanges, 9th largest globally by market ...

. They are popular with individual investors and traders particularly in

Hong Kong Hong Kong)., Legally Hong Kong, China in international treaties and organizations. is a special administrative region of China. With 7.5 million residents in a territory, Hong Kong is the fourth most densely populated region in the wor ...

China China, officially the People's Republic of China (PRC), is a country in East Asia. With population of China, a population exceeding 1.4 billion, it is the list of countries by population (United Nations), second-most populous country after ...

, and European countries (especially

Italy Italy, officially the Italian Republic, is a country in Southern Europe, Southern and Western Europe, Western Europe. It consists of Italian Peninsula, a peninsula that extends into the Mediterranean Sea, with the Alps on its northern land b ...

). They are seen as a flexible tool offering leveraged exposure to a wide range of underlying assets such as equity, asset baskets, indices, currencies and commodities, while offering the benefits of transparency and

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

. Popular indices, for example, include the FTSE100 in the UK or Germany's DAX, and popular commodities include oil,

gold Gold is a chemical element; it has chemical symbol Au (from Latin ) and atomic number 79. In its pure form, it is a brightness, bright, slightly orange-yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal ...

, and wheat.

Risks

The main exposure is to

market risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the m ...

as the warrant will be profitable only when the market price exceeds the strike price for a "call warrant" or is below the strike for a "put warrant". The inherent leveraging effect of the warrant significantly increases the risks and traders that are using warrant to speculate can make or lose significant sums very quickly. With covered warrants, the maximum loss is limited to the price paid for the warrant (ask or offer price) plus any commission or other transaction charges.RBS Guide to Covered Warrants Thus, although warrants are classed as high risk they are not as risky as other investment products such as contracts for differences or spread betting in which an investor would have to pay for future losses. Another aspect of risk is that an investor could lose their entire investment if the corporation issuing the warrant becomes insolvent.

References

External links