Warrant

Glossary

Banking

Warrant

Warrants are widely used in a variety of applications in finance. A warrant is similar to a financial option, an instrument that gives the holder the right to buy (in the case of a call warrant) or sell (in the case of a put warrant) at a fixed price at any time prior to expiry (American option) or at expiry (European option). Warrants are sold on equity (single stocks, stock baskets), debt, commodities, indices, baskets of indices, currencies, and other underlyings. Company-issued equity call warrants can be traded on regulated stock exchanges and once exercised, the warrant holder owns equity in the company. Covered warrants are sold by financial institutions, in OTC or listed format, as puts and calls, on a wide variety of underlyings. They are called covered because the financial institution will ‘cover’ its risk by owning the underlying or engaging in some form of hedging. Warrants are widely used in mezzanine financing as equity participation rights for buyers of these subordinated instruments, which are used in leveraged buyouts and other forms of highly leveraged finance. Mezzanine warrants offer holders a yield enhancement play. Companies can also issue debt with equity warrants attached, Once the instruments hit payment date, the bond and warrant typically detach and trade separately. Bonds with warrants (predominantly sold in US dollars) were popular with Japanese companies in the second half of the 1980s, when they sold hundreds of billions of dollars worth of such instruments when the stock market at the time was rising to its all-time high.

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