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A warrant is an investment instrument which gives the holder of the warrant the right, but not the obligation, to buy (or sell) a given quantity of the underlying asset from (or to) the issuer at a pre-determined price on or before its pre-determined date. The pre-determined price is also known as the exercise or strike price and the pre-determined date is the warrant’s maturity or expiry date.
Structured warrants are a type of option issued by a third-party financial institution on the shares of an unrelated company, a basket of companies’ shares, or an index. Structured warrants can never be a complete substitute for the underlying asset. Because of the leverage nature of the warrant, both the potential gains and losses can be very significant.
Many investors, at the recommendation of their brokers, were advised to invest in warrants and structured warrants. However, more often than not, these recommendations were unsuitable given the client’s age, risk tolerance and investment objectives. Moreover, many advisors failed to fully inform their clients of the risks associated with warrants and structured warrants, including (1) Limited Life Risk, (2) Credit Risk, (3) Liquidity Risk, (4) Leverage Risk, (5) Asset Price Risk, and (6) Takeover Risk.