Equities - Special Products
Subsumed under this rubric are products that entail certain features atypical of more liquid tradable investments, be they illiquidity or greater risk/return skew (asymmetry.)
- Warrants: similar to an option, but issued by the company the stock of which gives the holder the right, but not obligation to purchase, warrants may be attached to a company's debt as a sweetener or trade separately. Options, by contrast, are created by the exchange. There are call warrants enabling the holder to purchase a certain number of shares of the security by a certain date, and put warrants enabling the holder to sell a certain number of shares back to the company issuing the warrant by a certain date. This exercise may be American style (on any date) or European (only at expiry). Below are warrants based upon markets and currencies that may subject the investor to market and foreign currency risk.
- Index Warrants – Based on the performance of an underlying stock index; settlement is in U.S. dollars.
- Currency Index Warrants – Based upon the performance of an underlying currency index, these settle in U.S. dollars.
- Currency Warrants – Based upon the performance of an underlying currency. Settlement is in cash, to the extent that the warrant is in the money (the strike price is below the currency price for a call and above the price for a put).
- Options: derivatives and/or contracts the value of which are based upon, or derived from, the value of the security upon which they are based. The options tested on the Series 7 exam include stock, stock index and foreign currency options. Know how to calculate payoffs using a T chart, maximum gains and losses. Options may be used to protect an existing stock position, generate income or simply gain exposure to actual securities without owning them, a lower cost alternative.