A call warrant gives you the right to buy the underlying instrument at a later date for an agreed price. Of course you will only want to exercise this right if the price of the underlying is higher than the strike price (“in the money”). This way you could buy the underlying instrument from the issuer at the strike price and sell it on at the currently higher price on the stock exchange. If the price of the underlying is at (“at the money”) or below (“out of the money”) the strike price, it does not make sense to exercise the purchase right. In this case you would lose your invested capital.
The picture looks exactly the other way around for a put warrant. Here you get the right to sell the underlying instrument at a later date for an agreed price. You will only want to exercise this right if the price of the underlying is below the strike price (“in the money”). In this case, you can buy the underlying instrument on the stock exchange and sell it to the issuer at the higher strike price.
In practice, instead of the actual delivery of the underlying instrument the transaction tends to be settled in cash by paying the difference between the price of the underlying on the day of exercise and the strike price.
Warrants give the investor the chance to benefit at disproportionately high rates from fluctuations in the price of the underlying. This leverage effect is due to the relatively lower capital investment involved in the purchase of a warrant in comparison with an investment in the underlying instrument.
The price of a warrant is influenced by the following variables during its term: