Covered Warrants I

1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27   

11. Types of covered warrant II (underlying assets)

This continues the list of different types of warrant by looking at some of the other varieties possible.

Basket Warrants

Basket warrants are issued over groups of securities. Usually the basket focuses on a sector, which can be valuable in a market where a lot of information, from sub-indices to stockbrokers’ research, is organised on a sectoral basis. Analysts will often form opinions about the value of their sector as a whole, enabling clients to switch between sectors at favourable times. Such sector warrants could almost be considered as mini-tracker investment trusts.

For example, in a bullish market, it is possible to buy call warrants linked to the Dow Jones Euro STOXX sector indices of technology or energy.

Index Warrants

Frequently the most actively traded warrants on overseas markets are index warrants.

In Italy in June 2002, 60% of all warrant trades were concentrated on just two underlyings - the MIB30 Index and the Nasdaq 100 Index.

Used as a proxy for the underlying market, primary market indices such as the FTSE 100 Index in the UK, the Dow Jones Industrial Average Index in the US, and the Nikkei 225 Index in Japan have a high profile and are closely followed by a large number of investors. Whilst not everyone will have an opinion on the likely direction of BP, Barclays Bank, or Tesco, most investors absorb a good deal of information about the overall market, and enough to form a judgement.

How exactly do you buy or sell a market index?
The index level is treated in the same way as a share price, and because the number is usually high, the cover ratio of index warrants is often set to a multiple such as 10, 100, or 500. An example helps to explain.

Example

Bond Warrants

Many equity investors have never bought bonds, and have scant understanding of how the returns are calculated, which ones are best, and how they are bought and traded. One answer is to buy a call or a put warrant on a mainstream bond. We will have to see if any are issued in the UK, but if so then warrants may well prove to be a useful way of gaining access to a financial asset which is otherwise oddly remote from the reach of private investors.

Commodity Warrants

Warrants are available on brent crude oil on some European markets, but do not expect the warrants market to extend to pork bellies, cocoa, soyabeans, lead, nickel, silver, and jet fuel. Covered warrants are not a direct substitute for the futures markets, and will not be directed that frequently towards commodities, which do not generally attract much trading demand from private investors. On occasions warrants may be made available on commodities in the news such as oil or gold.

Currency Warrants

Covered warrants can be issued on currency pairs to allow investors to take a position on individual exchange rates. A call warrant on the euro against the yen, for example, would rise in value if the euro strengthened, and a put warrant vice-versa.

1. Introduction 2. What are covered warrants? 3. Comparison between corporate warrants and covered warrants 4. Advantages of warrants 5. Advantages of warrants – the magic of gearing 6. Disadvantages of warrants 7. Advantages & disadvantages - a summary 8. International warrants markets 9. UK warrant market 10. Types of covered warrant I (warrant terms) 11. Types of covered warrant II (underlying assets) 12. Types of covered warrant III (exotics) 13. Information on warrant terms 14. Warrant trading 15. Warrant pricing 16. Basic analysis I (underlying asset) 17. Basic analysis II (prices and terms) 18. Basic analysis III (gearing) 19. Basic analysis IV (intrinsic value) 20. Basic analysis V (premium) 21. Advanced analysis I (Black-Scholes Model) 22. Advanced analysis II (volatility) 23. Advanced analysis III (the greeks) 24. Risk 25. Trading strategies 26. Tax 27. Conclusion

• Andrew McHattie on Covered Warrants