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ADVFN HomeHelpCovered WarrantsCovered Warrants by Alpesh PatelFreeing Cash
Covered Warrants by Alpesh Patel
  So how am I going to use them?
  Pick the right risk/reward profile
  Intrinsic Value
  Time value
  Relationship between the warrant price and the price of the underlying security
  Who is it for?
  Technicalities
  Other strategies
  Tax management
  Freeing Cash
  Conclusion
  What are they?

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.

figure 8



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