Traditional corporate equity warrants

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18. Further topics

This course provides an introduction to warrants, and for the majority of warrant investors it contains all that's necessary to understand the topic. However, the analysis of warrants is not limited to just what appears in this course. There are quite a few other more advanced topics that the serious warrant investor may like to follow up. A summary of some of the more important topics is given below.

Advanced analysis

Charts

Many share investors find technical analysis (also known as 'charting') very useful - usually as a complement to fundamental analysis. Technical analysis can also be applied to warrant price charts. A caveat here is that warrant trading volumes tend to be low, so extra care must be taken in interpreting their charts with the heightened danger of 'false signals'.

Certainly a very useful application of charts is plotting the share price against the warrant price, where their relationship can be analysed quite simply visually.

Scatter charts/Correlation analysis

A popular form of analysis involves plotting the share price against the warrant price for all warrants in the market on one chart. (Note: the share and warrant prices would usually be normalised by dividing by the exercise price). A line of best fit is then drawn through the warrants. This allows for the identification of a normal share/warrant relationship to be determined, and further for the identification of out-lying warrants that stray from this normal relationship.

Advanced valuation

The most advanced indicator we looked at in this course was the CFP. Recall that the CFP calculation took into account the warrant's: time value, parity ratio, and maturity. An enhancement of this calculation is to account also for the dividends paid on the underlying shares.

Possibly the most significant enhancement to the trend of incrementally increasing the sophistication of this analysis, would be to take account also of the risk-free interest rate and the volatility of the underlying shares. By this point, one is in the territory of options valuation models such as Black Scholes.

Strategies

Most investors will be mainly interested in speculating in warrants. However, there are a number of other strategies that could be considered. This includes gearing and hedging switches, and arbitrage.

International warrants

This course has been centered around warrants issued by UK companies that are listed on the LSE. However, warrants are a worldwide phenomenon and in fact the UK has one of the smaller warrant markets. The most mature market is in the U.S.; the largest is Japan, while other active centers include Frankfurt, Paris, Hong Kong and Singapore.

Covered warrants

All the warrants we've considered in this course have been issued by companies, where the warrants are exercisable into shares of the company. However, other entities can issue warrants as well, convertible into all types of assets. For example, many warrants are issued by investment banks, that are convertible into company shares, or indices, or sector indices, or baskets of stocks or currencies etc. These types of warrants are called covered warrants, and in truth they bear closer similarity to OTC options rather than the company-issued warrants we've been looking at in this course. But the covered warrants market is growing very strongly, and in some countries is larger than the ordinary warrant market.

1. Introduction 2. What is a warrant? 3. The warrant market 4. Advantages of warrants over shares - the magic of gearing 5. Further attractions of warrants 6. Disadvantages of warrants 7. Fundamentals - warrant terms 8. Fundamentals - intrinsic value and parity ratio 9. Basic analysis 10. Analysis - time value and premium 11. Analysis - gearing 12. Analysis - break-even and capital fulcrum point 13. Analysis -sample spreadsheets 14. Analysis - summary 15. Investing strategies 16. Dealing in warrants 17. Warrant exercise 18. Further topics 19. Further information 20. Conclusion

• Andrew McHattie on Covered Warrants