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Warrants

Warrants are similar to call options. They provide the opportunity to purchase a fixed number of shares at predefined price during a certain period. Unlike options, they increase the number of shares of the company. Warrants are issued by companies that have trouble selling the new issues shares or bonds.

Similar to the options, warrants have strike price. Strike price of warrants is also called executive price. At the time of issuing warrants strike price is usually set to be higher than current market prices.

Minimum (theoretical) value of warrants (MVV) can be determined by the formula:

MVV = (P - S) N

P - the market price of share
S - strike price
N - number of shares that could be bought by one warrant

If the market value of share is less than the strike price of warrant, minimum value of warrant is zero. In other cases, the warrants is said to be "in the money".

Warrants, however, are usually sold at the higher prices than theoretical. The reasons are the same as for the options: time left until the maturity date, the risk of underlying security and so on.


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