What is Warrant?

The meaning of warrant refers to a financial derivative that provides its buyer with the right to buy a specific asset (underlying asset) from the issuer of the warrant, at a previously stipulated price (strike price) and within a specified period or with an expiration date.

Specifying a little more, it is a negotiable security issued by an entity that grants the right by paying a price to buy (call warrant) or sell (put warrant) a specific amount of a asset.

What is a warrant and how does it work?

These types of operations are recommended to experienced investors. The reason is that warrants depend on a significant number of external factors. They can actually be seen as a gamble on how we think shareholder value will evolve.

In reality, instead of buying a share, a right to buy or sell a share is acquired. acción. To better understand this concept, we will use warrant examples. Let's imagine that we acquire a warrant for a value of less than 10 euros for one year. This implies that at the end of twelve months the client must decide whether to buy the entire security or not, but not at the price established in a year, but at the price when the warrant was acquired.

If, after twelve months, this share costs twelve euros, you will only owe 10 euros for it, since you had previously acquired a purchase warrant. Therefore, you will have gained two euros in value by buying it two euros cheaper in relation to the value of the mercado.

The ratio of a warrant reflects the number of warrants that are needed to be entitled to acquire / sell a unit of the underlying asset. In most cases, this ratio is different from the unit, so the warrant price will have to be divided or multiplied by the aforementioned ratio to find out the amount that would be necessary to spend to have the right to buy / sell.

An example might be buying a warrant-call from a company with a ratio of 0,25. This therefore means that to be entitled to acquire a unit, 4 warrants-calls will have to be purchased.

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