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Warrant (finance)

Warrant (finance) Definition

A warrant is the right but not the obligation to buy or sell a certain quantity of an underlying instrument at an agreed-upon price. The right to buy the underlying instrument is referred to as a call warrant; the right to sell it is known as a put warrant. In this way a warrant is very similar to an option. The difference is primarily that the length of time available to exercise a warrant is much longer than most option contracts. Most warrants have 5-10 years before they must be exercised or expire worthless.

Additional meaning of Warrant (finance):

There are two types of warrants: "traditional" warrants and so-called naked warrants.

Traditional warrants are issued in conjunction with a bond (known as a warrant-linked bond), and represent the right to acquire shares in the entity issuing the bond. In other words, the writer of a traditional warrant is also the issuer of the underlying instrument. Warrants are issued in this way as a 'sweetener' to make the bond issue more attractive, and to reduce the interest rate that must be offered in order to sell the bond issue.

Naked warrants are issued without an accompanying bond, and like traditional warrants, are traded on the stock exchange. They are typically issued by banks and securities houses. The writer of a naked warrant need not be the issuer of the underlying instrument. A naked warrant is essentially an option with a very long time to expiry. Therefore an employee stock option is also equivalent to a warrant.

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