We start from the basic concept of this financial economy term. The Warrants are securities listed on the Stock Exchange that allow their owners the opportunity but not the obligation to convert them into shares of the issuing company and then buying or selling these shares. In other words they are financial products that have underlying shares, the exercise of which may result in the issuance of new shares by the company or dealings in shares already in circulation. The purchase price is predetermined and is called the strike price. The warrants giving the right to acquire such warrants are call and the ones that give the right to sell such warrants are put. Usually the warrants are being launched to coincide with an increase in capital or with bond issues. Their issue is successful when a company has excellent growth prospects. In this case, the shares will be issued at a premium but the owner will buy at a fixed price, a profit. The warrants are not purchased by shareholders who seek to control the company but by operators who specialize in this financial product. There is a real market listing of the warrants whose value is linked to that of the company’s shares.
Covered warrants are a special category of this financial instrument or rather their evolution which has similarities and differences. In fact, the covered warrants may be underlying not only actions but also bonds, equity indices, bond indices, baskets of securities , baskets of interest rates or all the assets for which there are official prices. Even in this case there is a difference between call covered warrants ie. call options and put covered warrants ie. put options depending on whether the contract provides for the right to buy or sell the deadline underlying financial asset at a predetermined price also known as the strike price against payment of a premium. But in addition to the purchase and sale of the underlying, the warrants cover may also include the collection of an amount based on the difference between the settlement price of the underlying and the strike price or vice versa. In addition, while the company issuing the securities warrants and the one that issues the underlying asset coincide, in covered warrants they are different. In fact, the purpose of the latter is not to raise capital but to take a road of covered warrants independent of the issuer. Finally, the option of covered warrants must be exercised within a specified period, usually not exceeding 18 months.
A concept of extreme importance for the covered warrants is the leverage effect which is the significant increase in yields or losses that can be drawn from following the performance of the underlying action with boosting on the changes. If you invest directly in the underlying asset it is necessary to use a large capital by investing in covered warrants just a fraction of this. In this part the trend of the market benefiting from the leverage effect there are some similarities with certificates with lever. The main difference lies in the fact that the certificates lever are not based on options so they do not see their value decline as the date of expiry nears. Usually, the certificates have a duration of five years lever. This feature makes it a more attractive trade on the secondary market within a few days seeing a multiplication of the gains if the underlying asset went in the expected direction.