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Warrant
Structure and featuresComparison with call optionsTypes of WarrantsTraditionalNakedThird Party WarrantsGovernment issuedTraded warrantsPricing
Structure and featuresComparison with call optionsTypes of WarrantsTraditionalNakedThird Party WarrantsGovernment issuedTraded warrantsPricing
Third Party Warrants
Third-party warrant is a derivative issued by the holders of the underlying instrument.Suppose Company X issues one million warrants which gives the holder the right to convert each warrant into one share at $ 500. This warrant is company-issued. Suppose, a mutual fund that holds 10,000 shares of X sells warrants against those shares, also exercisable at $ 500 per share. These are called third-party warrants.The primary advantage is that the instrument helps in the price discovery process. In the above case, the mutual fund selling a one-year warrant exercisable at $ 500 sends a signal to other investors that the stock may trade at $ 500 levels in one year. If volumes in such warrants are high, the price discovery process will be that much better; for it would mean that many investors believe that the stock will trade at that level in one year.
Third-party warrants are essentially long-term call options. The seller of the warrants does a covered call-write. That is, the seller will hold the stock and sell warrants against them. If the stock does not cross $ 500, the buyer will not exercise the warrant. The seller will, therefore, keep the warrant premium.