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Warrants are much similar to call options, and it will usually confer the same rights as an equity option and they can even be traded in secondary markets. Despite of all the facts, warrants have several key differences:

• Private parties issue the warrants, typically these private parties are corporation on which a warrant is based, rather than a public options exchange.

• When the warrant issued by the company is exercised, new shares of stock are issued by the company, so there would be an increase in number of outstanding shares. Where as when a call option is exercised, an existing share from an assigned call writer is received by the owner of the call option (except in the case of employee stock options, where new shares are created and issued by the company upon exercise). Unlike common stock shares outstanding, warrants do not posses voting rights.

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In this article I have discussed the uses of warrants and the risk that are involved in the trading of warrants.

Uses of Warrants

Following are the uses of warrants:

• Portfolio protection: By put warrants the investors are allowed to protect the value of their portfolio against falls in the market or in particular shares.
• Low cost
• Leverage

Risks Involved In Trading of Warrants

In trading warrants certain risks are involved that also includes time decay.

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In this article I will discuss the USA GAAP, Types of Employee Stock Options and Taxation of employee stock options in the USA.

USA GAAP

According to US generally accepted accounting principles that took effect before June 2005, stock options that are granted to employees did not need to be recognized as an expense on the income statement when granted, although in the notes the cost was disclosed to the financial statements. By this a potentially large form of employee compensation is allowed to not show up as an expense in the current year, and therefore, currently it overstate income. It has been asserted by many assert that over-reporting of income by such methods as this by American corporations had been one of the factors that contributed in the Stock Market Downturn of 2002.

In the US, employee stock options have to be expensed under US GAAP. Each company must initiate expensing stock options from the first reporting period of a fiscal year that began after June 15, 2005. As for most companies the fiscal years are the calendars, for most companies by this it means beginning with the first quarter of 2006.

As a result of this, companies by which the expensing options have not been voluntarily started will only see an income statement effect in fiscal year 2006. After the effective date, companies will be allowed, but they are not required, to restate prior-period results.

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In foreign exchange markets, when trading currency options in a particular currency pair there are four key dates that are to be considered:

Horizon

Horizon is referred to as the date on which the trade originates (usually today)

Spot

Spot is referred to as that date on which the initial transfer of funds takes place

 

Expiry

Expiry is referred to as that date on which instrument expires

Delivery

Delivery is referred to as that date on which the final transfer of funds generated from the maturity of the instrument takes place

We can summarize these dates on the following timeline:

Calculating Spot Dates

Whenever the spot date has to be calculated then for this purpose the horizon date (T) is used. Below are the two possible cases:

1. If the currency pair is USD/CAD then Spot is T+1 day. In this case T+1 must be a business day and also it should not be a US holiday. If an unacceptable day is encountered, then move forward one day and it has to be tested again.
2. Otherwise Spot is T+2 days. It is must that each currency should be considered within the pair separately in order to calculate T+2. There must be one clear working day between the horizon date and the spot date, for USD and there must be two clear working days between the horizon date and the spot date, for all non-USD currencies.

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In foreign exchange markets, the first currency in a currency pair is the base currency. Whereas the second currency is referred to as the quote currency which is also called as counter currency, terms currency. Exchange rates are quoted in per unit of the base currency. The thing that should be noted is that FX market convention is the reverse of mathematical convention.

Currently for base currency, the euro has first precedence; as a result of this all currency pairs involving it should have the euro as the first currency. For instance, the exchange rate will be identified as EUR/USD between the US dollar and the euro; the number shows the amount of US dollars that can be traded for one euro.

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