Consider the following options data:

Question

(a) Determine the amount of profit or loss associated with each option, ignoring brokerage fees.

(b) Differentiate a warrant from a right.

Answer 1

(a) Call (30 - 25) × 100 shares - 200 = $300 profit.
Warrant (46 - 40) × 3 shares = $18 TVW.
$18 - $6 = $12/warrant profit
Put 250/100 = $2.50
50 - 2.50 = 47.5 - 45 = 2.50 (100) = $250
Profit is $250.

(b) Stock purchase warrants give their holders the option to purchase a certain number of shares of common stock at a specified price. Warrants are quite similar to stock rights in that they result in new equity capital. The right provides for the maintenance of pro rata ownership by existing owners, while the warrant has no such feature; rather, the warrant is generally used to make other forms of financing more attractive. The life of a right is typically only one or two months, whereas a warrant is generally exercisable for a period of years. Also, rights are issued at an exercise price below the prevailing market price of stock, while warrants are issued above the prevailing price. Warrants are often attached to debt or preferred stock issues as sweeteners or may be used as compensation in a merger.