Warrants as investment financial instruments

When a company needs to obtain funds in the financial market, warrant securities appear as a real guarantee through the immobilization of a stock in an authorized deposit

General warrant

Warrants are a financial instrument represented in securities that grant rights to buy or sell a certain asset called the " underlying asset " at a predetermined price known as the " exercise price ".

These are issued by an organization or entity in the medium and long term. These titles grant whoever buys them a right to buy or sell the asset that is the object of the contract.

Possible underlyings of a warrant include; shares, portfolios of shares, bonds, currencies, raw materials, stock indices, interest rates, exchange rates, under certain conditions.

When the contract is made, the buyer of the warrant must clearly know the following aspects:

The price at which you will be able to buy or sell the asset The amount of asset to which each warrant entitles you The expiration date or the period of time during which you will be able to exercise your right against the asset Disbursement of the premium to acquire the title.

Warrant price

The issuer of the warrant sets the exercise price and the premium to be paid for each warrant at the time it is issued

Warrant securities can be used by companies when they have a surplus of capital and wish to invest in securities or when they expect their expected future returns based on assets to obtain a positive final flow against warrant trading.

Within this aspect, the decision-making made by the financial manager comes to play an important role since the investment in warrants can be considered with the intention of maintaining them until the end of the contract and obtaining the primary benefit or on the contrary with the intention of keep them for a shorter period, thanks to the possibility they offer of being bought and sold in the market to obtain a greater profit.

Uses of the warrant

Warrants can be used to:

Retain the product while waiting for better prices and have working capital in the meantime. When, for seasonal or production reasons, there is a stock without immediate use. Have funds that make it possible to acquire a greater quantity of merchandise to store. Purchase of raw materials Make up prior financial commitments Pay miscellaneous expenses.

Yield warrant

The performance of the warrant titles varies depending on the evolution of the price of the asset on which they are issued. Generally, warrants are settled by subtraction and the title holder has the right to:

Receive the difference between the price at which the asset is in the market and the exercise price for the purchase rights Receive the difference between the exercise price and the settlement price for the sale rights Negotiate the securities in the markets of capital and financial until their maturity. Make the profit effective through the exercise or sale of the title in the Stock Exchange.

The warrant holder will only execute his rights when the differences that occur between the exercise price and the settlement price or between the settlement price and the exercise price are positive.

In the event that the differences are negative, it is not convenient for the holder of these securities to execute his rights, he will not exercise the right that the warrant has given him to buy or sell the underlying asset at the exercise price when the prices at the who can buy or sell said asset on the market are better.

In this case, the holder would lose the price paid for the warrant, but not the differences against him, since what he acquires when buying the warrant is a right and not an obligation.

For this reason, the interest of these products lies in the possibility of being able to buy or sell them in the markets at all times throughout their entire life, in this way the holder can react and make the decisions that are best for him. the variations in the price of the underlying asset on which they are issued and that occur continuously in the markets.

Warrant classes

Warrants are complex financial products, hence the problem when defining what a warrant is increases with the number of forms of negotiable securities that carry that name.

Purchase warrants

These entitle its holder to purchase the asset at the exercise price. The settlement occurs, if positive, between the difference between the settlement price and the exercise price.

Sale warrants

These entitle its holder to sell the asset at the exercise price. The settlement occurs, if positive, between the difference between the exercise price and the settlement price.

Warrants to the European

The right they incorporate can only be exercised on a certain date, which is the expiration date of the warrant.

The investor could obtain benefits when the price of the assets increases considerably, but he almost never loses, since if the price of these falls he will make the decision not to acquire the asset.

American Warrants

The right they incorporate can be exercised throughout the life of the warrant until its expiration.

Warrants «Bermuda»

The right they incorporate can be exercised on various specified dates throughout the life of the warrant, including the date of its expiration.

Warrants on indices

These can be buy warrants on indices and sell warrants on indices. The former give the acquiring holder the right to receive the difference in cash, if any, between the value of the index on the exercise date and its estimated value under the conditions of the issue. The holder of a sale warrant on indices acquires the right to receive the difference in cash, if any, between the estimated price at the beginning of the issue and the value of the index on the exercise date.

Warrant contracts

The credit operation granted by a bank, a financial institution or a private investor is based on the product offered by the depositor, which is accepted as collateral and is guarded by International Warrants in its own deposits, third parties or the depositor himself.

The credit Warrant does not affect other lines of credit, but the commercial history and financial situation of the loan applicant (depositor) are taken into account.

Three types of subjects intervene in its instrumentation:

The depositor

It is the one that has a product suitable for placing under Warrants.

The financial institution

That prior approval of the applicant against the presentation and endorsement of the document Warrants accepts the operation and assigns a credit.

The company warrant

That he must receive the product from the depositor, control quality and quantity, issue the certificate of deposit and the warrant, guard the product during the period of validity of the operation and make the final return of the product.

Warrant warehouses

They are all those private warehouses in which goods are deposited, with prior official authorization, which remain stored for a period of time and for which they must pay a storage fee. The warehouse manager gives the owner of the merchandise a certificate-receipt. The goods deposited there must pay a fee

Types of products that can be objects of warrants

In the agricultural area

In the case of producers with storage capacity and mills, it is used on stored grains. In the case of distributors, dealers or importers, they can be used on agricultural machinery, irrigation equipment, other types of machines, seeds and agrochemicals.