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Warrants - Warrants Copyright 1998-2006 Investment...

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1 Warrants Warrants Copyright © 1998-2006 Investment Analytics
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Copyright © 1998-2006 Investment Analytics Warrants Slide: 2 Roadmap: Warrants Stock Short Put Call •Floor •Warrants •SCORES •Buy-write •Put Warrants •PRIMES OTM Call Call Spread •Collar •PERCS •SHIELDS •ELKS •DECS •PRIDES Debt •Convertibles •PENS •SUPERS •GROIS Equity Swap
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Copyright © 1998-2006 Investment Analytics Warrants Slide: 3 Agenda: Warrants What are warrants How they are traded Warrant valuation Warrant markets
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Copyright © 1998-2006 Investment Analytics Warrants Slide: 4 Warrants Option to purchase stock Agreed strike price (Subscription price) Fixed term, typically 4-5 years Either European or American Issuer: Mainly corporations Some third party issuers Most warrants issued as part of package Stock or debt issue - “Bonds cum Warrants” Warrants usually detachable Bonds subsequently traded “Expaper” - straight debt
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Copyright © 1998-2006 Investment Analytics Warrants Slide: 5 Rationale for Issuing Purpose: Increase attractiveness of offering Reduce financing cost Tax & Accounting Advantages Fair market value of warrant treated as equity rather than as debt for convertible bond Issuer can use “Treasury Stock” method for EPS rather than “if converted” method for convertibles Amortized warrant value allocated to host bond Increases interest expense for accounting purposes
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Copyright © 1998-2006 Investment Analytics Warrants Slide: 6 Warrant Types Warrants with Common Stock or Bonds Debt Warrants Allow investors to purchase additional debt Warranted bond usually has same coupon & maturity as host bond Harmless Warrants: Variant of debt warrants Warrant not exercisable until host bond becomes callable If warrants exercised bonds will be called, so no increase in debt
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Copyright © 1998-2006 Investment Analytics Warrants Slide: 7 Warrant Types Covered Warrants Synthetic warrants issued by third party e.g. Japanese debt warrants: BT issued identical warrants in local currency for Swiss investors Put Warrants Right to sell company’s common stock Typically used as part of share repo program e.g. company wants to hedge employee share options Takes in option premium Asset Warrants Based on any asset, e.g. currency, Nikkei 225
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Copyright © 1998-2006 Investment Analytics Warrants Slide: 8 Warrant Trading Mostly OTC Exchange traded: Rules for common stock apply Settlement 5 days from trade date Can be bought on margin Can be sold short, but only on plus tick Must borrow warrant to sell short
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Copyright © 1998-2006 Investment Analytics Warrants Slide: 9 History of Warrant Market 1920’s bull market Used for speculation Abandoned after collapse in 1929 1960’s : conglomeration (until 1969) 1970’s 1st major blue chip issue (AT&T) Listed by NYSE for first time 1980’s: Japanese Warrant Market $65Bn in 1990 $3Bn in 1992
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