Learning Centre
What are Warrants and How are they Valued? (January 2010)
Friday, January 01, 2010
A warrant is a security that gives the holder the right to purchase securities from the issuer at a specified price within a certain time frame. Warrants are typically offered directly by the issuer, and when exercised, require the issuer to issue new securities. Warrants trade on the market separate from the underlying security. Of note, warrant holders have the opportunity to acquire the respective securities at a price potentially lower than the market price.
Intrinsic Value and Time Value
The value of a warrant can be broken into two components, intrinsic value and time value. Intrinsic value is the amount by which the market price of the underlying security exceeds the subscription price of the warrant. Even when warrants are out of the money (i.e. no intrinsic value), they still may have what is known as time value, which is related to the market’s view of the potential for the warrants to become “in the money”, prior to expiry. The longer the time period until expiry, and the more volatile the underlying security, the higher the time value will be.