Covered Warrants

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We have had a few enquiries asking us to explain the term "Covered Warrants".

Covered Warrents are similar to options in respect of strike prices and life span.

They are financial instruments, listed on the LSE, allowing investors to go long or short on shares, indices, currencies and commodities.

They have a limited life span (9 months max) and you can only lose the amount of money you put in, although the profit is potentially unlimited.

Eaxamples: FTSE100
Index now 6087. The FTSE 6100 JUNE 2007 CALL is priced at 32p and has a parity of 1000

Therefore if the index moves 500 points the warrant price would be 6600(Underlying price)-6100(Exercise price)/1000(Parity)=50p

So, 20000 Warrants at 6400 GBP would be 10000 GBP/USD

One currency warrant buys exposure to 10 USD

The payout formula for a call is:

Exchange rate-Strike x Nominal value (10)
Exchange rate

The payout formula for a put is

Strike- Exchange rate x Nominal value (10)
Exchange rate

If you thought the USD will go stronger you would buy a GBP/USD PUT
For example the 1.85 JUNE 2007 PUT is 4.85p

If you would like further information please don't hesitate to contact us.