What is it ?
- Covered warrants allow the holder to buy or sell a specific amount of any financial asset ( both call and put warrants exist) from/to the issuer ( a financial institution), at a specific price and on or before a specified future date.
How is it constructed ?
- Investor pays an initial amount (like a regular option premium) to buy a warrant certificate.
What is the payoff ?
When is it used ?
- Used when investor seeks leveraged exposure to an underlying.
- Used when an investor wishes to hedge their existing exposure e.g. buying a covered put warrant on existing long position in underlying.
- Tends to be longer-dated.
What are the benefits ?
- Higher liquidity than traditional warrants, and the issuer has the obligation to always act as a counter party to quote a bid/ask price whenever an investor wish to exercise their rights, thus no liquidity problems for the investor.
- Cost of warrant is commonly low, thus offers a viable option for private/retail investors.
- No stamp duty (tax level) to pay.
- Highly geared and leveraged, potential large gain from little initial investment.
- Maximum loss limited to that initial investment
- Enable investor to gain exposure to movement of a range of underlying assets and trade profitably in both bullish and bearish market.
- Can be used to hedge position exposure.