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Covered Warrants

Covered Warrants by Alpesh Patel

Freeing Cash

Yet another strategy for using warrants is to free up capital. Let's look at an example.

It's 27th November 2001. You own 10,000 shares in BA. You decide to sell them to raise £21,750. You buy 10,000 BA warrants (let's say a 9 month maturity with a £2.25 strike price at 55p each) - that's the equivalent of owning 10,000 BA shares. But you only have to pay £5,500. So you have the same exposure to BA and get £16,250 cash freed.

However, remember a warrant has an expiry date. And should the shares for instance be below the exercise price at expiry then the warrants would be worthless.

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