Warrants belong among financial derivatives - derived securities. They represents the right to buy (call warrant) or sell (put warrant), exactly specifies amount of underlying asset (stocks, share index, currency, commodity) for pre-arranged strike price and on fixed date - maturity. Very attractive attribute of warrants is leverage, because of which you may invest much lower sum than with investing in underlying asset. The current price of warrant varies on the price of underlying asset. Leverage guarantees that a little percentage change in asset's price causes big change in warrant's value. This holds for profits but also for losses!

Warrant advantages

• Low price - warrant prices fluctuate around eurocents and euros. Thus they become affordable also for smaller investors and private clients
• Broad range of underlying assets - warrants may be issued on various kinds of underlying assets. Investors can participate in increases (but also decreases) in values of shares (Czech and foreign), share indices, foreign currencies or commodities
• Wide offer - currently there are about 45 000 warrants on Stuttgart derivatives market EUWAX. Investors can choose from different strike prices or expiry dates for a specific underlying asset

Warrant risks

• Leverage risk - leverage causes higher profits but also higher losses in comparison with direct investment in underlying asset. It is said generally that higher leverage means higher risk for the investment in warrant.
• Risk of total loss - warrant becomes worthless if you miss the maturity or the underlying's price falls below strike price
• Risk of change in volatility and price - value of warrant is influenced also by its lifetime or volatility of underlying. This causes that time value changes daily and warrant's price may fall also if price of underlying stagnates. The closer is warrant's maturity, the lower is its time value and on maturity days it equals zero. Higher time value can lead to higher price risk.
• Price risk - warrant's value depends on underlying's price and this may led sometimes to total loss of invested capital
• Liquidity risk - warrants are mostly issued in smaller volumes, this may cause big fluctuations in prices or problems with full satisfaction of the order

Further information about warrants

You may find detailed information about warrants by clicking here.