Warrants

harishs21
Posts: 2
Joined: Thu Dec 10, 2015 7:08 am

Warrants

Postby harishs21 » Fri Dec 11, 2015 5:14 pm

Dear Tutor,

Could you please explain mechanism of Warrant with an example?

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edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Warrants

Postby edupristine » Mon Dec 14, 2015 12:28 pm

Hi Harish,
Warrants are securities which give holder a right to buy company’s common stock on strike price until the expiry date. Warrants can be for the long time. If the current market price is above the strike price, that it can be sold in the market to make profit otherwise it will expire.
For example: Consider a warrant holder to purchase 100 shares of Company ABC for $10 per share anytime in the next three years. If Company ABC shares rises to $20, the warrant holder could purchase the shares for $10 each, and immediately sell them for $20 on the open market, generating a profit of ($20 - $10) x 100 shares = $1,000. Thus, the minimum value of each warrant is $10.

harishs21
Posts: 2
Joined: Thu Dec 10, 2015 7:08 am

Re: Warrants

Postby harishs21 » Wed Dec 16, 2015 4:09 pm

Thanks for your clarification.
Please explain how Warrant's premium is determined.
For example: Consider a warrant holder to purchase 100 shares of Company ABC for $10 per share anytime in the next three years. What would be its cost?

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Warrants

Postby edupristine » Thu Dec 17, 2015 9:17 am

Hi Harish,
Warrant Premium= 100 * [(Warrant price + exercise price - current share price) / current share price]
So if an investor holds a warrant with a price of $20, current market price is $20 and exercise price is $10( price at which warrant holder will buy the bond) then
= 100* [($20 + $10 - $20)/$20
=100* [($30-$20)/$20]
=100* ($10/$200
=100* $0.5
= $50


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