Because the stock is selling for 45 per share the

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Unformatted text preview: on stock at $40 per share. Because the stock is selling for $45 per share, the theoretical warrant value, calculated in the preceding example, is $15 [($45 $40) 3]. The warrant premium results from positive investor expectations and leverage opportunities. Stan Buyer could spend his $2,430 in either of two ways: He could purchase 54 shares of common stock at $45 per share, or 135 warrants at $18 per warrant, ignoring brokerage fees. If Mr. Buyer purchases the stock and its price rises to $48, he will gain $162 ($3 per share 54 shares) by selling the stock. If instead he purchases the 135 warrants and the stock price increases by $3 per share, Mr. Buyer will gain approximately $1,215. Because the price of a share of stock rises by $3, the price of each warrant can be expected to rise by $9 (because each warrant can be used to purchase three shares of common stock). A gain of $9 per warrant on 135 warrants means a total goal gain of $1,215 on the warrants. CHAPTER 16 Hybrid and Derivative Securities 695 The greater leverage associated with trading warrants should be c...
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