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Covered warrants (Each covered warrant will have a term sheet which will…
Covered warrants
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Advantages
Initial outlay is only a fraction of that of the buying or selling underlying assets in the relevant spot market
Stamp duty (currently 0.5%) is not applicable, because trades are cash- settled
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As they are leveraged derivative instruments they allow investors to obtain greater exposure than through direct investment
Disadvantages
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After the expiry date has passed, the covered warrant is worthless
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There are two types:
Call covered warrants
Gives the holder the right without any obligation to purchase underlying equities or other underlying assets at a pre agreed price referred to as the strike price. The price paid for this right is referred to as the covered warrant premium
An investor is purchasing the right to buy an underlying asset believing that the price is going to rise. This is indicative of a bull market
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Put covered warrants
Gives the holder the right without any obligation to sell underlying equities or other underlying assets at a pre agreed price. The price paid for this right is referred to as the premium
An investor is buying the right to sell an underlying asset believing that the price of that underlying security is going to fall. This is indicative of a bear market where investors sell the assets hoping to buy them back t a lower price in the future
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Similar deviate instruments to ordinary warrants however they are issued by third parties rather than the original share issuing company. There is now a put version - that is giving the right to sell the company shares
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The issuers or writers protect themselves by buying the underlying securities in the market, alternatively issuers may already hold the underlying assets
Provide a holder with the right without obligation either to buy or sell an underlying asset from or to the issuer through a broker at a predetermined price
The price paid is down as the premium and this is usually a small fraction of the price of the underlying asset
The actual purchase of the covered warrant itself would be made through a stockbroker rather than the company whose share the covered warrant is based
The purchaser would already have established a trading account with their stockbroker and would have indicated their intention to trade in covered warrants
The investor will have to agree to a disclaimer and must indicate that they understand the product and the internet risks in a combined risk / suitability questionnaire
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When assessing profits or losses or making decisions to buy or sell investors may also consider brokers commissions and transaction charges
There is a legally binding obligation on the issuer to make or to take delivery of the underlying assets or cash settle if the purchaser decides to exercise the warrant during its life.
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If the warrant is exercised or if it is exercised automatically the trade usually has to be settled with the market within five working days of the covered warrant expiry