A warrant is a type of derivative : a financial instrument that gets its value from an underlying commodity. In foreign exchange transactions, the underlying commodity is a currency pair.

Like options, warrants give you the right — but not the obligation — to exchange one currency for another at a pre-agreed exchange rate, known as the strike price, on or before a certain date. So, for instance, you could buy a warrant that gives you the right to exchange Dollars for Euro at a strike price of EUR/USD 1.20  until it expires on 31 December.

While warrants and options behave similarly, they differ in two fundamental respects:

• Length

Where an option is a short-term instrument that typically expires within a few months, warrants last longer. The typical warrant is valid for one to two years, and some last for as long as five years.

• Issue

Any investor can buy or sell options. By contrast, you can only get a warrant from the company that issues it.

This means that:

• While options are standardised contracts regulated by the exchange on which they’re traded, one warrant’s terms can be different from another’s, because it’s the individual issuers who set them
• Options are freely traded on exchanges, but warrants are usually only available over the counter
• Because options are freely traded on exchanges, the market determines the price. This means you can find out how much options cost and track their price over time. By contrast, the issuer determines a warrant’s price

• Just as there are put options and call options, there are put warrants and call warrants. A call warrant gives you the right, but not the obligation, to buy the underlying commodity from the issuer, while a put warrant gives you the right, but not the obligation, to sell the underlying commodity back to the issuer. Warrants where the underlying commodity is a currency pair are usually call options.
• Issuers sometimes link warrants to bonds, shares, or other types of equity. The warrant protects bondholders or shareholders from currency fluctuations that could impact their bonds’ or shares’ value.
• A warrant that isn’t linked to a bond, share, or other type of equity is known as a covered warrant. Ironically, another name for a covered warrant is ‘naked warrant’.

Want to know more? 

• Unlike conventional warrants, covered warrants can be traded on stock exchanges. This document issued by the London Stock Exchange explains how covered warrants work in detail, as well as the risks involved.
• Because they can be traded on stock exchanges, covered warrants are sometimes used by speculators. This video outlines the risks and runs through a number of effective trading strategies.

Assure Hedge’s perspective 

‘If you have regular exposure to foreign currency fluctuations, warrants can be a more convenient way to hedge your risk than options. Because warrants expire after years, not months, you can retain a long-term hedging position without having to roll it over every so often.

Needless to say, warrants aren’t suitable for everyone and you should make sure you understand the risks before you trade them.’

Trading in leveraged financial instruments such as Options or other financial derivatives, carries a high level of risk and may not be suitable for all investors. Investors who make use of these financial products run the risk of substantial capital losses which may exceed your initial deposit. Assure Hedge UK Ltd makes no claim or warranty regarding either the appropriateness or suitability of these instruments for your purposes whether commercial or otherwise. Assure Hedge UK Ltd may provide general commentary or educational material available on its website or otherwise, which is not intended as investment advice. You should carefully consider your financial situation and needs and seek independent advice from a duly authorised financial adviser. Assure Hedge UK Ltd assumes no liability for errors, inaccuracies or omissions; does not warrant the accuracy, completeness of information, text, graphics, links or other items contained within these materials. You should read and understand Assure Hedge Uk Ltd’s Terms of Use prior to taking any further action.