Covered warrants

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.







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