UK investors may be familiar with traditional equity (or ‘corporate’) warrants, which have been listed on the Exchange for a number of years. There are several key differences between these warrants, and the new covered warrants.
New tricks need to be learned
Those investors already familiar with UK equity warrants will probably find huge gaps in their knowledge when the time comes to consider covered warrants. There is a lot to learn, some of which is common sense, and some of which is more appropriate for mathematically-inclined readers who find the whole process of analysis and selection absorbing. The process of issuance is different, and the way in which prices are formed is different, which in turn means that traditional forms of analysis need to be adapted and developed.
It will not be sufficient to stick with the same valuation models, applying them directly to the new covered warrants. Using a flat screwdriver to turn a Phillips screw works up to a point, but it lacks force at the point of tension – when you really need it to work. Having the right tools for the job means understanding where important characteristics differ between traditional listed equity warrants and covered warrants.
The table below lists the main differences between the traditional corporate warrants and the new covered warrants.
| Traditional corporate warrants | Covered Warrants |
|---|---|
| Issued by company over its own shares | Issued by bank or institution over other assets |
| New shares issued upon exercise | No new shares issued |
| Call warrants only | Call, put, and exotic warrant structures |
| Maturities typically several years | Maturities typically one or two years |
| Restricted liquidity | Good liquidity |
| Held by individuals and by institutions | Designed for private investors |
| Priced according to supply and demand | Priced according to fair value models |
| Price competition from different market-makers | Price competition from different warrant issues |
| Data and information scarce | Data and information readily available |
| Stamp duty payable | Stamp duty not payable on cash-settled warrants |
| Required to sign risk warning notice before dealing | Required to sign risk warning notice before dealing |
| Listed on the London Stock Exchange | Listed on the London Stock Exchange |
As can be seen, some elements are different, and some are the same. The various aspects are explained at greater length throughout this course. But the point to note for now is that there are significant differences between the two forms of warrants.
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