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Warrants

 

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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.

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.

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.

See also: Stock option, Derivative security, Derivatives market

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