The Financial Engineer

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.