Warrant is a security giving right to the shareholder to buy a stock on a certain date or period in the future at the given price.

Based on the definition, a warrant could be said as an option or a call option, because it gives right to the shareholder for buying an asset or stock. Still, what's the difference between warrant and option?

The definition of option is wider than warrant, because the option includes the call option or put option for the contract writer, while the warrant is only the sales contract for the writer. In addition, the warrant written by the issuer in order to sell stocks, while the option can be written by all the market traders to sell the outstanding stocks in bourse. Later, though the warrant and option are the instruments traded in market, the warrant usually released by issuers.

How much is the warrant value?

Because it is a derivative instrument, the value of warrant also depends on the value of underlying asset, or in this case the relevant stock.

For example XYZ share today costs Rp 1200. While the XYZ warrant has an exercise price of Rp 1000 with six months period.

It can be said that XYZ warrant is in the money, or in the other words it has an intrinsic value Rp 200. The value emerges because the warrant holder can buy shares cost Rp 1000 through the warrant and then sells it to the market with the price Rp 1200, meaning makes profit: Rp 200.

However in market, XYZ warrant price would be traded higher than Rp 200, why?

If in the example, XYZ warrant traded in market at Rp 250. The difference between the market price and the intrinsic value is Rp 50, then it can be said as the time value. It occurs because until the next six months there is a possibility that XYZ stock increases more than the prevailing price Rp 1200.

All warrants would have time values. Even if the warrant is out of the money, for instance the share price Rp 900 under the exercise price Rp 1000, in market, the warrant keeps being traded with one price because of the time value. Yet, as time goes by, the time value would keep decreasing and reach zero until the warrant matures.

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