Press releases 2002
28 October 2002
Covered warrants take off
160 covered warrants were issued today as the London Stock Exchange launched its new covered warrant market, making them available to the UK private investor for the first time. The Exchange expects more covered warrants to be issued in the days ahead.
Covered warrants are now available on some of the UK's leading companies and international indices. These include companies like BP, GlaxoSmithKline and Vodafone, as well as indices such as the FTSE100, NASDAQ100 and Dow Jones Industrial Average.
Commerzbank Securities, Dresdner Kleinwort Wasserstein, Goldman Sachs International, JP Morgan, SG and TradingLab will all have covered warrants programmes that give private investors geared access to a range of underlying assets.
To coincide with the market launch, the Exchange has developed a dedicated educational online service. Available at: www.londonstockexchange.com/coveredwarrants the key features include:
- in-depth information for private investors, stockbrokers and issuers; and
- a pricing analysis tool providing 15 minute delayed prices and comprehensive details of covered warrants listed on the Exchange.
Clara Furse, Chief Executive of the London Stock Exchange, said:
"The launch of the covered warrants market today is a significant step both for the London Stock Exchange and the UK private investor. Investors in the UK now have access to a low cost financial product, which opens up a much wider range of investment strategies on a variety of assets.
"Key attractions of covered warrants include gearing and the ability to trade free of stamp duty when investors use cash-settled warrants. Together these aspects make for an exciting market for retail and institutional investors."
Covered warrants give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price, during, or at the end of, a specified time period. They have proved very popular investment products in other European markets, where over 51,000 listed covered warrants last year attracted turnover of 52 billion with typical volumes of 85,000 trades per day.
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About Covered Warrants
A covered warrant is a financial instrument, issued by financial institutions, that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price during, or at the end of, a specified time period.
Covered warrants may be either Calls or Puts, depending on whether the investor believes that the underlying asset will either rise or fall in value.
- A Call warrant rises in value when the underlying asset rises in value.
- A Put warrant rises in value when the underlying asset falls in value.
Two covered warrant contract styles will be available to private investors.
- A European covered warrant means that the warrant can only be exercised at expiration.
- An American covered warrant means that the warrant can be exercised at any time up to expiry.
Covered warrants have a number of key advantages:
Covered warrants allow an exposure to an underlying share with less financial outlay than trading the share itself. Similarly, the gain (or loss) can be greater than actual movements in the underlying investment
Reduction in cost of investment
Covered Warrants are not subject to stamp duty
Covered warrants allow investors to take advantage of rising or falling markets
Covered warrants are often used to hedge against other existing investments allowing more effective asset allocation strategies
Investors can only lose the amount they paid for the covered warrant
Important points to consider
The geared nature of a covered warrant means that a relatively small movement in the price of the underlying security results in a disproportionately large movement, favourable or unfavourable, in the price of the warrant. Warrant prices can therefore be volatile.
Also, because warrants are limited in time, if the investor fails to exercise, the investment becomes worthless. Investors therefore need to actively monitor their warrants, particularly nearing expiry.
Covered warrants may not be suitable for all private investors. Prospective investors should ensure that they fully understand the nature of covered warrants and the extent of their exposure to risk and should seek the advice of their broker or independent financial adviser for further assistance.