Both warrants and call options give the holder the right, but not the obligation, to buy an underlying asset at a predetermined price (strike price) before a specific expiration date. However, there are some key differences between the two:
Issuer: A warrant is typically issued by the company that issued the underlying security, while a call option is typically issued by a brokerage firm.
Terms: Warrants have longer lifetimes than options. Warrants can be valid for several years, whereas options typically expire within a year.
Exercise: The holder of a warrant can exercise it at any time before the expiry date, while the holder of a call option can only exercise it on or before the expiration date.
Dilution: When a warrant is exercised, new shares are created by the issuer, which can dilute the value of existing shares. This is not the case with call options, as they are settled in cash.
Trading: Warrants are traded on the stock exchange, just like stocks, whereas call options are traded on options exchanges.
Price: Warrants tend to be cheaper than options, as they have longer lifetimes and are not as liquid.
Overall, warrants and call options are similar in that they provide investors with the right to buy an underlying asset at a predetermined price. However, the differences in their terms, exercise rules, issuer, dilution, trading, and price can impact their value and how they are used in investment strategies.
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