A warrant gives the holder the opportunity to buy or sell an underlying at a future date for a fixed price. The two basic types of Warrants are "Call Warrants" and "Put Warrants". Call Warrants allow investors to profit from underlying price rises. Put Warrants allow investors to profit from underlying price falls.

A Call Warrant gives the holder the right, but not the obligation, to buy the underlying for a fixed price known as the "exercise price" at a future date. Taking up this right is know as "exercising" the warrant.

A Put Warrant gives the holder the right, but not the obligation, to sell the underlying to the Warrant Issuer for the exercise price (also known as "exercising" the warrant. )

NOTE: This is a hypothetical example.

• The graph shows the percentage change in the value of a hypothetical underlying compared with the value change in a call warrant and a put warrant. It illustrates the increased exposure to underlying price movements which warrants provide.
• During a 100 day investment period, the underlying price falls by 10% (at Point A) and increases by 8% (at Point B).
• The underlying price varies over an 18% range during the investment period. In contrast, the call warrant fluctuates within approximately a 75% range of the purchase price.
• The put warrant also fluctuates within approximately an 80% range during the investment period but in an opposite direction to the call warrant.
  Exercise price

The agreed price is known as the exercise price. This is the price at which a warrant holder may buy or sell the underlying assets.

A call warrant is said to be out-of-the-money when the exercise price is higher than the underlying price and in-the-money when the exercise price is lower than the underlying price.

A call warrant will be worthless if the undelrying price is lower than the exercise price on the expiry day. However, with upward movements in the underlying price, the holder can still earn excellent returns trading the warrant prior to the expiry date.

The opposite occurs for a put warrant. It will be in-the-money when the exercise price is above the undelrying price and out-of-the-money when the exercise price is below the underlying price. With downward movements in the underlying price, the holder can make profits trading the put warrant prior to its expiry date.

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Exercise style and expiry date

There are two styles of exercise for warrants - American and European. An American style warrant allows holders to exercise their warrants at any time up to and including their expiry date.

European style warrants allow conversion only on the expiry date.

Investors should also note the conversion ratio of a warrant. This is important in determining the quantity of warrants needed to be exercised to buy or sell one underlying.

Warrants may sometimes be Cash Settled. They are usually European in style (that is they may not be exercised prior to expiry) and investors are given a cash amount equivalent to the amount the warrant expired "in-the-money." If for example a given warrant had a strike price of $10.00 and the undelrying price at expiry was $12.00 then the investor would receive $2.00 per warrant (assuming the conversion ratio was 1:1).

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