91Ó°ÊÓ

A warrant could be security used in a fund that gives the holder the right to buy or sell a stock, regularly the shares of the company issuing the warrant, at a certain cost known as the exercise price. Comparative to alternatives, warrants are legally binding financial instruments that grant the holder elite rights to buy stocks. Both are arbitrary and have time limits.

Calculating the number of warrants

$\begin{array}{rcl}\mathit{N}\mathit{u}\mathit{m}\mathit{b}\mathit{e}\mathit{r}\mathbf{ }\mathit{o}\mathit{f}\mathbf{}\mathit{w}\mathit{a}\mathit{r}\mathit{r}\mathit{a}\mathit{n}\mathit{t}\mathit{s}& \mathbf{=}& \frac{\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{s}\mathbf{t}\mathbf{m}\mathbf{e}\mathbf{n}\mathbf{t}}{\mathbf{S}\mathbf{e}\mathbf{l}\mathbf{l}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{ }\mathbf{p}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{10}}\\ & \mathbf{=}& \mathbf{100}\\ & & \end{array}$

New price = $40

Old price = $20

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}& \mathbf{=}& \mathit{N}\mathit{e}\mathit{w}\mathbf{}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{-}\mathit{O}\mathit{l}\mathit{d}\mathbf{}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\mathbf{-}\mathbf{\$}\mathbf{20}\\ & \mathbf{=}& \mathbf{\$}\mathbf{20}\\ & & \end{array}$

$\begin{array}{rcl}\mathit{T}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathbf{}\mathit{d}\mathit{o}\mathit{l}\mathit{l}\mathit{a}\mathit{r}\mathit{s}\mathbf{}\mathit{g}\mathit{a}\mathit{i}\mathit{n}\mathbf{}& \mathbf{=}& \mathbf{}\mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{×}\mathit{N}\mathit{u}\mathit{m}\mathit{b}\mathit{e}\mathit{r}\mathbf{}\mathit{o}\mathit{f}\mathbf{ }\mathit{s}\mathit{h}\mathit{a}\mathit{r}\mathit{e}\mathit{s}\\ & \mathbf{=}& \mathbf{\$}\mathbf{20}\mathbf{×}\mathbf{50}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Calculating percentage return on the stock

$\begin{array}{rcl}\mathit{P}\mathit{e}\mathit{r}\mathit{c}\mathit{e}\mathit{n}\mathit{t}\mathit{a}\mathit{g}\mathit{e}\mathbf{}\mathit{r}\mathit{e}\mathit{t}\mathit{u}\mathit{r}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{s}\mathit{t}\mathit{o}\mathit{c}\mathit{k}& \mathbf{=}& \frac{\mathbf{G}\mathbf{a}\mathbf{i}\mathbf{n}}{\mathbf{O}\mathbf{l}\mathbf{d}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{20}}{\mathbf{\$}\mathbf{20}}\\ & \mathbf{=}& \mathbf{100}\mathbf{\%}\\ & & \end{array}$

Calculating Intrinsic value

$\begin{array}{rcl}\mathit{I}\mathit{n}\mathit{t}\mathit{r}\mathit{i}\mathit{n}\mathit{s}\mathit{i}\mathit{c}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}& \mathbf{=}& \mathit{S}\mathit{t}\mathit{o}\mathit{c}\mathit{k}\mathbf{ }\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{-}\mathit{C}\mathit{o}\mathit{m}\mathit{m}\mathit{o}\mathit{n}\mathbf{}\mathit{s}\mathit{t}\mathit{o}\mathit{c}\mathit{k}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\mathbf{-}\mathbf{\$}\mathbf{18}\\ & \mathbf{=}& \mathbf{\$}\mathbf{22}\end{array}$

Intrinsic values are $22 at 0 speculative premium

Calculation of gain

The new price is $22

The old price is $10

$\begin{array}{rcl}\mathit{G}\mathit{a}\mathit{i}\mathit{n}& \mathbf{=}& \mathit{N}\mathit{e}\mathit{w}\mathbf{}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{-}\mathit{O}\mathit{l}\mathit{d}\mathbf{}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{w}\mathit{a}\mathit{r}\mathit{r}\mathit{a}\mathit{n}\mathit{t}\\ & \mathbf{=}& \mathbf{\$}\mathbf{22}\mathbf{-}\mathbf{\$}\mathbf{10}\\ & \mathbf{=}& \mathbf{\$}\mathbf{12}\\ & & \end{array}$

Calculation of total dollar gain

$\begin{array}{rcl}\mathit{T}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathbf{}\mathit{d}\mathit{o}\mathit{l}\mathit{l}\mathit{a}\mathit{r}\mathbf{}\mathit{g}\mathit{a}\mathit{i}\mathit{n}& \mathbf{=}& \mathit{G}\mathit{a}\mathit{i}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{w}\mathit{a}\mathit{r}\mathit{r}\mathit{a}\mathit{n}\mathit{t}\mathbf{×}\mathit{N}\mathit{u}\mathit{m}\mathit{b}\mathit{e}\mathit{r}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{w}\mathit{a}\mathit{r}\mathit{r}\mathit{a}\mathit{n}\mathit{t}\\ & \mathbf{=}& \mathbf{\$}\mathbf{12}\mathbf{×}\mathbf{100}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{200}\\ & & \end{array}$

Calculating the percentage return on the warrant

$\begin{array}{rcl}\mathit{P}\mathit{e}\mathit{r}\mathit{c}\mathit{e}\mathit{n}\mathit{t}\mathit{a}\mathit{g}\mathit{e}\mathbf{}\mathit{r}\mathit{e}\mathit{t}\mathit{u}\mathit{r}\mathit{n}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{w}\mathit{a}\mathit{r}\mathit{r}\mathit{a}\mathit{n}\mathit{t}& \mathbf{=}& \frac{\mathbf{G}\mathbf{a}\mathbf{i}\mathbf{n}\mathbf{o}\mathbf{n}\mathbf{w}\mathbf{a}\mathbf{r}\mathbf{r}\mathbf{a}\mathbf{n}\mathbf{t}}{\mathbf{O}\mathbf{l}\mathbf{d}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{o}\mathbf{f}\mathbf{w}\mathbf{a}\mathbf{r}\mathbf{r}\mathbf{a}\mathbf{n}\mathbf{t}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{12}}{\mathbf{\$}\mathbf{10}}\\ & \mathbf{=}& \mathbf{120}\mathbf{\%}\\ & & \end{array}$

Calculation of Stock price

$\begin{array}{rcl}\mathit{S}\mathit{t}\mathit{o}\mathit{c}\mathit{k}\mathbf{}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}& \mathbf{=}& \mathit{O}\mathit{p}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{ }\mathbf{ }\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{-}\mathit{I}\mathit{n}\mathit{t}\mathit{r}\mathit{i}\mathit{n}\mathit{s}\mathit{i}\mathit{c}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\\ & \mathbf{=}& \mathbf{\$}\mathbf{18}\mathbf{-}\mathbf{3}\mathbf{.}\mathbf{50}\\ & \mathbf{=}& \mathbf{\$}\mathbf{14}\mathbf{.}\mathbf{5}\\ & & \end{array}$

With a stock price of $14.5, the warrant would be a negative intrinsic value.The warrant should be less or equal to $14 with a speculative premiumof $3.5; it is worthless.