Warrants
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Join →What Are Warrants?
A warrant is a derivative security that gives its holder a defined right, under specified terms, to buy or sell an underlying asset at a predetermined price or receive a value linked to that underlying asset. The exact structure depends on the warrant.
Basic Characteristics
- Underlying: the asset or reference instrument to which the warrant is linked.
- Strike price: the predetermined price relevant to the exercise terms.
- Expiration: many warrants have a defined maturity.
- Leverage: a warrant can provide amplified exposure to movements in the underlying, while also increasing risk.
Warrants are often issued by financial institutions or other entities, which makes their structure different from standardized exchange-traded options. We must therefore examine the individual warrant’s terms before trading it.
Example
A warrant linked to a stock can change in value as the stock price changes, but the warrant’s price is also affected by its remaining maturity and other contract characteristics.
Key Terms
Warrant, derivative, underlying, strike price, expiration, leverage.
Knowledge Check
- What is a warrant?
- Why must we examine the individual terms of a warrant?
- Why can leverage increase both opportunity and risk?
