Warrant Premium
Categories: Investing, Derivatives
A warrant works much like an option, providing the holder with the right to buy or sell a security (if they want to...the warrant holder can choose whether or not to exercise them). The warrant comes with a pre-set price, known as the exercise price.
There are two measures that get the name "warrant premium." (We know, a little confusing...like if you have two cousins named "Joey.")
The first figure measures the difference in value between the warrant's price (meaning the amount you'd have to buy the warrant in the open market) and what's called the minimum value of the underlying security (sometimes called intrinsic value).
So what's minimum value? This figure gets determined by calculating the difference between the exercise price and the current trading price for the underlying stock. If the warrant is “in the money,” meaning the exercise price is below the current trading price, the minimum value would represent the amount you could make by exercising the warrant immediately.
You have a warrant to buy 100 shares of JumpCo, maker of fine jump ropes. The exercise price of the warrant is $50 a share. Which means that, if you choose to use the warrant, you can buy 100 shares of JumpCo at $50 a share. JumpCo is currently trading at $55 a share. The minimum value is $5 a share, or $500 total for the 100 shares included in the warrant..
Say this warrant for JumpCo is selling for $700 in the open market. Then the warrant premium equals $200 (the $700 warrant price minus the $500 minimum value). Okay, that's one calculation of warrant premium.
The second way provides a variation on the same idea. It gives a percentage difference between the cost of buying the warrant versus just buying shares in the open market.
The warrant costs $700, plus the 100 shares at $50 dollars each. Buying the warrant, then immediately turning it into shares, would cost $5,700. You have to spend $700 on the warrant; then, exercising it for the shares would cost $5,000 ($50 times the 100 shares).
Meanwhile, JumpCo is trading at $55 a share. One hundred shares would cost $5,500 to buy. The warrant costs $200 more. As a percentage of the current share price, that equates to 3.6%.
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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