What is ‘Warrant Premium’
The amount that an investor must pay above the current market price for a security, when purchasing and exercising a warrant. The warrant premium represents the cost of purchasing a share through the warrant, compared to buying the share directly through the open market.
It is calculated as:
[(warrant price + exercise price – current share price) / current share price] * 100
For example, an investor holds a warrant with a price of $10 and an exercise price of $25. The current share price is $30. The warrant premium would be [($10+$25-$30)/$30]*100 = 16.7%.
Explaining ‘Warrant Premium’
Warrants have both a price and premium. Typically, the premium will decrease as the price of the warrant rises and the time to expiration decreases. A warrant is in the money when the exercise price is less than the current share price. The more in the money the warrant is, the lower the warrant premium is. High volatility can also cause the warrant premium to be higher.
Further Reading
- Evidence on the issuer effect in warrant overpricing – www.tandfonline.com [PDF]
- Impact of warrant introductions on the behaviour of underlying stocks: Australian evidence – onlinelibrary.wiley.com [PDF]
- The Chinese warrants bubble – www.aeaweb.org [PDF]
- Warrants pricing: stochastic volatility vs. Black–Scholes – www.sciencedirect.com [PDF]
- Warrant introduction effects on stock return processes – www.tandfonline.com [PDF]
- The Operation of the Modern Financial – books.google.com [PDF]
- Warrant pricing—Is dilution a delusion? – www.tandfonline.com [PDF]
- Why are derivative warrants more expensive than options? An empirical study – www.cambridge.org [PDF]
- Robustness of option-like warrant valuation – www.sciencedirect.com [PDF]
