The issuer of warrants aims to make a profit by setting premium prices that investors pay upfront for warrants. The issuer profits if warrant prices do not surpass the strike price at expiration, avoiding payouts to investors. However, there may be a conflict of interest as the issuer provides advice to investors while also having an incentive to structure warrants in a way that favors their own profits over investor returns.

1. Warrants: The business model of the issuer.
In this presentation, I am going to overlook the Greek
letters and whatever other inputs an investor may have into
account before using these products.
What I am trying is to think from the issuer's
perspective.
By Jorge Cid
jorge.cidmoreno@hotmail.com

2. What are we going to cover here?
What is a warrant?
The main elements of a warrant
The business model of the issuer
How do they make the profit?
Isn't there a bit of a problem of conflicting
interests?

3. What is a warrant?
A warrant is an investing instrument similar to an option in the
sense that it gives the holder the right but not the obligation
to buy an underlying security at a certain price, quantity
and future time.
It is unlike an option in that a warrant is issued by a
company,
whereas an option is an instrument of the stock exchange.
The underlying asset could be a commodity, an index, a
currency or an equity.
There are call warrant and put warrant. A call warrant gives
the
investor the right to buy the intrinsic asset. A put warrant
gives the holder the right to sell the underlying security.

4. The main elements of a warrant
The strike price, that is the value at which the holder of the
warrant can buy (call) or sell (put) the intrinsic asset.
The premium, or the cost of the warrant: It means how much
an investor has to pay in order to buy the warrant.
The leverage or the conversion ratio: it means how many
stocks (for instance) you are exposed for each warrant you
have bought.
The expiration date

5. The business model of the issuer
In this presentation, I am going to overlook the Greek letters
and whatever other inputs an investor may have into
account before using these products.
What I am trying is to think from the issuer's perspective.
I mean, every time a company decides to launch a service or
a product is because the company is expecting to get a
profit.
In the case of warrants of course is the same.
So that, get in mind that the company selling warrants is
thinking of making a profit.

6. How do they make the profit?
The only way is throughout the cost of each warrant, the
premium an investor pays in order to receive the right of
holding the product.
An investor will make a profit in different ways if he has
bought a call warrant or a put warrant. To simplify the
example let's focus only on call warrants. In that situation,
an investor will make a profit if the value of the underlying
asset at a certain time (let's imagine the expiration date) is
higher the strike price.
Eventually, something that is going to happen always is that
the issuer will have to pay to the investor every time the
price has surpassed the strike price.
To summarize: the issuer receives the income of the selling of
the warrants. At the expiration date, the company will have
to pay to the holder only if the prices have favored the
position of the investor.

7. Conflicting interests?
What does it mean?
We have been told that the premiums (or the price an investor
has to pay to buy a warrant) are decided by following
complicated mathematical procedures. Of course, I think it
is in that way.
However, think about it: the source of their profit is the
money they make thanks to those premiums, and at the
same time, thanks for not having to pay to the investors
every time the expiration date arrives.
But, if this is true, why are these companies giving advice
to
investors? I mean, they settle the price and choose the
assets and strike prices in order to make a profit. If at the
end of the life of the warrant the investor has made the
right decision, the company will face a loss.
Isn't there a bit of a problem of conflicting interests?