7.d Warrants and Exotic Options
Warrants¶
Warrants are financial instruments granting the holder the right to purchase a company's stock at a specific price before a certain date.
- Purpose: Raise capital and make securities offerings more attractive to investors.
- Characteristics:
- Leverage: Gain exposure to stock price movements with a smaller initial investment.
- Expiration: Longer expiration periods compared to options.
- Dilution: Exercise of warrants can lead to shareholder dilution.
Exotic Options¶
Exotic options are non-standard options with complex features tailored to specific needs.
- Examples:
- Barrier Options: Activated or deactivated when the underlying asset's price reaches a certain level.
- Asian Options: Payoff depends on the average price of the underlying asset over a set period.
- Lookback Options: Allow the holder to "look back" over time to determine the optimal exercise price.
- Purpose: Customized risk management or speculative strategies in niche markets.