This document provides an introduction to warrants, including: Call warrants give the holder the right to purchase an underlying security at a predetermined strike price. Put warrants give the holder the right to sell an underlying security at a predetermined strike price. Warrants can be American or European style. Warrants provide leverage, as investors can gain exposure to price movements of underlying securities while investing less capital. They also offer reduced costs compared to trading the underlying directly. The maximum loss is limited to the initial premium paid. Various types of warrants exist, including single equity, basket, barrier, bond, index, discount, and capital protection warrants. The pricing of warrants depends on factors like the underlying share price, time

1. Introduction to Warrants
Date - Speaker

2. What is a warrant 3
Call Warrants 6
Put Warrants 7
Styles 8
Advantages and General Terminology 9
Types of Warrants 12
The Mathematics 13
Table of Contents

3. Defining a Warrant:
A warrant is a geared financial instrument which gives the warrant holder
the right but not the obligation to buy, sell or participate in the performance
of the underlying security, before or on the expiry date
03 What is a Warrant / Definition

4. • Leverage/Gearing
To use a financial instrument to gain greater exposure to the potential return
on an investment while investing a smaller amount
• Underlying Security
What the warrant is written on. Can be a variety of securities ranging from
shares to currencies and commodities
• Cover ratio
The number of warrants one has to purchase to gain exposure to one security
= Conversion Ratio/Delta
04 What is a Warrant / Gearing / Underlying / Cover Ratio

5. • Strike Price/Exercise Price
The price, initially agreed upon, at which the investor can buy or sell the
underlying security
• Expiry Date
The last date on which the warrant holder can exercise their rights
• Time Value
05 What is a Warrant / Strike Price / Expiry Date / Time Value

6. Call Warrants
Gives the holder the option to purchase an underlying security at an agreed price
Example
If an investor believes that the price of Share A will increase they will buy a call warrant
that allows them to purchase Share A at the strike price R100. If in future the price rises
to R120 the warrants holder can exercise the right to purchase Share A at R100. If we
assume a cost of R5, a R5 loss will be realised as long as the price of the underlying is
lower than strike price, from R100 –R105, the loss becomes less and R105 is the
breakeven price in this example
06 Call Warrants / Definition / Example

7. Put Warrants
Gives the holder the option to sell an underlying security at an agreed price
Example
If an investor believes that the price of Share A will decrease they will buy a put warrant
that allows them to sell Share B at the strike price R90. If in future the price drops to R80
the warrants holder can exercise the right to sell Share B at R90. If we assume a cost of R5,
a R5 loss will be realised as long as the price of the underlying is higher than strike price,
from R90 –R85, the loss becomes less and R85 is the breakeven price in this example
07 Put Warrants / Definition / Example

8. Styles
American Style European Style
The warrant holder may The warrant may only be
exercise their rights at any exercised on the date
time between listing and of expiration
the expiry date
08 Styles / American / European

9. • Advantageous in bull and bear markets
Whether you believe the market is going to rise or fall there is a
warrant for you
• Reduced Cost
The cost of trading in the warrant is generally a lot cheaper than the cost of
trading directly in the underlying as you pay fees on the warrant cost and not
on the underlying nominal value
• Upside unlimited, downside limited
The maximum loss one can make on a warrant investment is the initial
price/premium paid to purchase the warrants
09 Advantages / Bull and Bear profit / Cost saving / Limited Downside

10. • Leverage
Investors can gain full exposure to the price movement of the underlying
securities by investing a smaller amount of capital. For example: If the leverage
on the warrant is 6, a 10% increase in the price of the underlying should result
in a 60% increase in the value of the warrant
• Market Maker
The issuer of the warrant will always buy back warrants should an investor
want to end his particular exposure
• Limited Life
Warrants have a limited life span and thus the warrant may expire without the
holder’s expectations being realised
010 General / Leverage / Market Maker / Limited Life

11. • Limitation of rights
Holding a warrant does not give the investor the same rights as holding the
underlying share until the warrants are exercised. An example of a right is -
voting at annual general meetings
• Extraordinary event
In certain circumstances the warrant issuer has the right, to declare an
extraordinary event, resulting in expiry of the warrant, prior to the specified
expiry date
• Credit Risk
Purchasing a warrant from a particular issuer implies that you are taking on
the credit risk of that issuer
011 General / Rights / Extraordinary Event / Credit Risk

12. Different types of warrants
Single equity warrants (vanilla warrants)
These are call and put warrants. They allow investors to buy (call) or sell (put) an underlying share at a
predetermined price on or before a specified date.
Basket warrants
Basket warrants are very similar to vanilla warrants except that the underlying asset comprises of shares
from a group of different companies. The companies concerned often carry out similar activities e.g.
mining or transportation.
Barrier warrants
Barrier warrants are similar to vanilla warrants except that they have a barrier level. If the price of the
underlying asset breaks this level, the warrant becomes worthless and holds no further rights to the
holder of the warrant.
Others are
Bond warrants
Index warrants
Discount warrants
Capital protection warrants
Currency warrants
Commodity warrants

13. Pricing and Valuation
The price of warrants is dependent on the following factors:
• Underlying share price
• Time to expiry
• Volatility
• Interest rates
• Dividend expectations
013 The Mathematics / Factors / Effect

14. • Buying XYZSBE warrants
• Priced at R 1 | Delta 0.5 | Conversion 10:1
• To get exposure to 1000 XYZ shares, Cover Ratio
• Conversion/Delta = 20 | Shares x Cover Ratio = 1000 x 20 = 20000 warrants
• 20000 warrants @ R 1 = R 20000
• XYZ share price moves from R100 to R110
• XYZSBE moves from R1 to R1.50 (R1*0.05)=warrant moves R0.05 per R1 for
underlying), 0.05 = 1/Cover Ratio
• R1.50 x 20000 warrants = R 30000
• End value/Begin Value = 30000/20000 = 50% growth for a 10% move in
underlying
* The above example ignore any transaction costs
014 The Mathematics / Example

15. Thank you
For more information:
tradingdesk@vunaniprivateclients.co.za
011 – 382 2920/3/7