Detachable Warrant
Categories: Derivatives, Trading
Everybody likes twofers, right? Yeah, yeah, ask Ryan Lochte. Well, the detachable bond is a twofer in the exciting world of derivatives trading.
A detachable warrant is a type of derivative that is commonly attached to a debt security such as a bond. The warrant grants the right (but not the obligation) to purchase a certain number of shares of the debt issuer's security at a certain price and within a certain time frame. Up to this point, it's similar to a call option.
Here's where it gets weird, and not just Lochte weird. The warrant literally can be detached from the debt security by the holder and held or sold separately.
So let's say you hold a bond in Company X that came with a detachable warrant to buy 50 shares of Company X in the next five years at the price of $10 per share. While a bond is a pretty safe investment (it's basically an IOU), you wouldn't want to bet that Company X's shares will rise from today's lousy price of 50 cents to $10 per share in five years. So you decide to sell the shares to some chump who does...and hold onto the bond.
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Finance: What is a Warrant?8 Views
Finance allah shmoop what is ah warrant Oh it's Acute
option Like kind of a stock option Light Yeah That's
How to think about it anyway Okay Okay It pretty
much feels just like a stock option And yes there
are put warrants and call warrants in the same vein
as put options and call options So then what's the
diff why don't we just call a warrant a stock
option Well warrants have you know their own little characteristics
here and they're usually issued by the company itself where
a stock options on say microsoft will They can be
issued by anyone who deals in options like goldman morgan
ups sumitomo whoever whatever investment bank that makes capital markets
trading happened they can issue options trade him have a
spread and then make profits in them and there's nothing
the company can really do about it They can all
create derivative securities on stocks or bonds of their own
volition And the company itself just kind of stands there
looking by and wondering why they didn't get into the
investment banking business Well goldman morgan and the others then
offer trading in those options on exchanges in regular form
Such that many buyers and sellers generally come together liquid
lee to trade and you know generate profit margins for
the desks of the bank's trading the securities right The
banks are basically the casino house and they end up
making most the money most of time Got that Okay
another difference warrants and options here Warming's can last five
ten twenty years that's Usually how many weeks options last
and the question remains Why would a company issue what
are essentially cheap stock options too Others to buy slices
of its own pie While the answer as with most
of these types of company deals is that the company
has to issue those warrants to get a deal done
like you know to settle a patent dispute or created
distribution or manufacturing partnership or some of their tactical arrangement
to make the good better and to make the problems
go away well warrants generally or simply held for the
duration of the partnership or of the company's existence is
an independent and city well and conversely options are traded
liquid leon exchanges all over the world and they can
be sold without a whole lot of discussion with company
Here this kind of warrant which gives you the right
to throw a piece of paper in your own financial
asset jail Very different kind of warrant than this one 00:02:18.383 --> [endTime] You stay away from the arrest warrants