Practical insight and analysis on the accounting, audit and tax issues impacting investment companies. Should Warrants Be Considered Derivatives? Posted by admin on Jul 26, 3:
Hire Writer Call option: It is an option which allows the option holder to buy or call a specific number of shares at a specific price, within an already specified time period Rao,p.
This implies that an investor would want to buy a call option if he expects the market price to rise above the exercise price Rao,p.
It is an option which allows the option holder to sell or put a specific number of shares at a specific price, within an already specified time period Rao,p. This is exactly vice versa to call option; therefore an investor would purchase a put option if he expects the market price of the stock to get lower than the exercise price.
Risk and Returns associated with options A lot of investors employ options as tools to mitigate their risk in investment, in other words, they insure their investment in stock against any fall in market price Rao,p.
This practice is also known as hedging, as the name suggests; the investors hedge their risk in the respective investment. However, despite its ability to hedge risks, it should never be neglected that like any other investment it has no guarantee of percent return or security.
An investor can risk investing huge sum in the shape of premium price of an option. But it is evident that the losses will be relatively lower than what actual stock holders will bear. Hence it can be verifiably be said that options are great instruments for mitigating risk, provided that an investor is able to predict the future stock price movement with much precision and exercise options at the right time in order to make profit.
A warrant is a security issued by a company which grants the warrant holder, a right to purchase a specific number of common shares at a specified price, before the warrant expires Mathur,p.
Investors exercise their warrants when they buy shares directly trading between the broker and the investoror trade over the counter. Warrant holders have no claim on dividends and no voting rights. Warrants also are issued with bonds and preferred stocks.
Moreover, warrants with bonds can be traded separately in the market as well Mathur,p. Characteristics of Warrants There are three main characteristics of warrants which are as follows, 1. Investors can exercise their option of converting the warrants into shares any time before the warrant expires Mathur,p.
Generally the life of a warrant is years. Hence, during this time, the warrant holder can easily exercise the warrant as per the need and opportunity.
The price that warrant holders agree to pay for buying shares in future, is known as exercise or premium price Mathur,p. Therefore, if the stock price rises, the warrant holder can either exercise the warrant to buy shares or sell the warrant in market.
However, if the current market price of the stock becomes equal to or less than the exercise price, the value of the warrant becomes zero Mathur,p.
Warrants are always issued by with provisions which clearly specify the number of shares that can be bought with a single warrant Mathur,p. How to cite this page Choose cite format:This paper provides quantitative data that, in many cases, open source software / free software is equal to or superior to their proprietary competition.
The paper examines market share, reliability, performance, scalability, scaleability, security, and total cost of ownership; it also comments on non-quantitative issues and unnecessary fears. This report will encompass brief explanation of common derivatives namely, options and warrants.
What are Options? A contract which enables the investor to buy or sell a particular financial instrument is known as an option (Rao, , p. ). The underlying financial product in . History: Kilgore College is a publicly supported, two-year, comprehensive community college offering postsecondary educational opportunities.
In Kilgore College was the idea of Mr. W. L. Dodson and the community of Kilgore, Texas. This compilation is dedicated to the memory of our nameless forebears, who were the inventors of the pens and inks, paper and incunabula, glyphs and alphabets.
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