What is a Warrant?

What is the difference between an American and a European option?

American Option – An option that can be exercised at any time before the expiration date.

European Option – An option that can only be exercised at the expiration date.

How is the value/price of a warrant determined?

Considering the following:

1. Volatility of underlying shares
2. The Dividend Yield
3. Premium to current share price
4. Maturity

What is a bond plus warrant package, and why would issuers use this?

This is mostly seen in the equity-linked market. In theory, the 2 parts can be traded separately as a straight bond and an independent warrant.

With the mark-to-market, the value of warrants is recognised through changes in the underlying share price, to avoid this, issuers may issue a bond in their desired currency and have a warrant in their ‘functional’ currency. This meant that the conversion of the warrants would be based on its fundamental share price performance rather than being influenced by changes in FX rates.

What is an example of this?

Siemens (a German engineering company) wanted USD debt financing – however, its functional currency was Euros. As a result, they issued a $3bn bond with Euro-dominated warrants in 2012.