Warrant. Concept and types.
Warrants and listed companies. For those new to capital markets, this concept will at least be familiar relating to economic press news about listed companies on markets such as the continuous Spanish Stock Exchange market (Bolsa Española) in Madrid, the Alternative Stock Market (MAB) or EURONEXT in Paris. Indeed, shares or shares portfolios are one of the underlying assets that warrants can have.
1.- What is a warrant? Concept.
A warrant is a security traded, it is to say admitted in an official securities market, by virtue of which the holder has the right (not the obligation) to buy or sell a certain asset amounts (known as the “underlying asset”) for a fixed price and for a given period of time.
The assets underlying the warrant can, as explained above, consist of shares or portfolios shares. But can also consist of many other types of assets listed or quoted on official markets, such as currencies, commodities, interest rates or even a determined stock market index.
Therefore, the warrant’s legal nature is a type of obligation assumed by its issuer before the acquirer in exchange for an initial fixed price (technically known as a “strike”). Thus, the warrant’s holder will get a return on his investment based on the difference between the acquisition warrant’s price and the value of the underlying asset at the time when, within the agreed period, decides to exercise the warrant.
2.- Types of warrant.
2.1.-By underlying asset. There are as many types of warrants as there are assets underlying them, which is why it is also a product of the so-called “derivatives”, since the value of this instrument derives from the underlying asset, which it represents. Thus, as we have already mentioned, we can talk about share’s warrants, bond, currency, interest rate, etc…
2.2- Call warrants which give the beneficiary the right to buy the underlying asset, or put warrants which give the beneficiary the right to sell it.
2.3.- European-style warrant vs. American-style warrant. The European style warrant can only be exercised on a specific date or dates (if it is set up in sections), agreed at the subscription time. On the other hand, in the American-style warrant, the warrant’s holder may exercise it at any time that deems appropriate, as long as it has not expired on the agreed terms upon subscription.
Founding partner – CEO of Devesa & Calvo Abogados.