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Glossary

Warrant

This type falls in the category of structured products with leverage. It can be of two types: call-warrant and put-warrant, they copy the purchase of a call- or put-option.
Warrant gives an opportunity to participate in the growth (call-warrant) or fall (put-warrant) of the underlying asset price with the minimum investments. The advantage of the warrant is that the investor doesn’t have to spend all his money on buying the underlying asset – it is necessary to buy a warrant on part of the money and thus have a chance to earn in a monetary value as much as the purchase or sale of the underlying asset could provide. But it will be larger in percentage terms, and this is the effect of leverage of this type of structured products.
The original price of warrant is set depending on various parameters: strike level, the underlying asset price, the underlying asset price volatility, warrant term, interest rate. During the trading, the warrant price can change nonlinearly, like an option one, in other words all the aforementioned factors will influence it.
The income on call-warrant is not limited on condition that the underlying asset price is higher than the original price. If at the expiration time the underlying asset price is lower than the original price, the investor loses all the invested money.

Example. Investor’s capital is $ 120. He can buy shares of Apple for $ 120 expecting them to rise $ 150 in a year and to earn $ 30 (25% p.a.) The second variant is to buy a call-warrant, where Apple shares will be the underlying asset. The warrant price is $ 10, the underlying asset original price is $ 120 per share. If at the warrant expiration time the share value is $ 150, the investor will earn 150 - 120 - 10 = $ 20, or 200%p.a. of the investment amount ($ 10) or 16.67% of the capital ($ 120). If the investor is aggressive and is sure in its forecast, he will buy 12 warrants for the whole capital money. If the expectations are met, the investor earns $ 240, or triples his capital. If the underlying asset price is less than $ 120, the investor loses all his money. And he’d have losses in investments equal to the price changes while buying shares. For example, the share costs $ 119.99 in a year. The loss will be 1 cent while buying a share, and $ 120 while buying warrant. The income on warrant is not limited (if the price doesn’t go down to zero) on condition that this underlying asset price is lower than the original price. If at the expiration time the underlying asset price is higher than the original price, the investor will lose all his money.

Example. The investor has $ 120. He can sell Apple shares (the cost of borrowing shares is excluded from the calculation) for $ 120 expecting them to cost $ 90 in a year and to earn $ 30 (25% p.a.). The second variant is to buy a put-warrant, where Apple shares will be the underlying asset. The warrant price is $ 10, the underlying asset original price is $ 120 per share. If at the warrant expiration time the share costs $ 90, the investor will earn 120 - 90 - 10 = $ 20, or 200%p.a. of the investment amount ($ 10) or 16.67% of the capital ($ 120). If the investor is aggressive and is sure in its forecast, he will buy 12 warrants for the whole capital money. If the expectations are met, the investor earns $ 240, or triples his capital. If the underlying asset price is more than $ 120, the investor loses all his money. And he’d have losses in investments equal to the price changes while selling shares. For example, the share costs $ 120.01 in a year. The loss will be 1 cent while selling a share, and $ 120 while buying warrant.

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