# Investments

# Thursday Terminology

"In-the-Money", "Strike Price"

Let’s look at warrants and some key investment concepts for you to know when trying to make a profitable investment (and we’ll get back to put and call options in a few weeks).

A warrant might seem a bit more complex than a share, and therefore you might hesitate to invest in such a security. Basically, a warrant is a **derivative** since its value is derived from an underlying share value.

A warrant is a security issued directly by the company and that gives you a right to buy shares in the future for a certain price - **the strike price **- during a certain time period - **the exercise period**. The basic rationale behind the construct is that if the share price is higher than the strike price at the time of exercise, the warrant will be valuable. It is then "**in-the-money**". And if the strike price is higher than, the share price they are "**out-of-the-money**" (because then it makes more sense to buy the share outright).

So let’s look at an example.

Warrant price: 20

Exercise period: in 3 years (for 2 months)

Strike price: 3.500

Current price per share (PPS): 3.000

If the PPS is 4.000 when the exercise period comes, then the warrants will be *in**-the-money*: 4.000 - 3.500 = 500

and you will hence benefit from using the warrants to the buy shares. Your net profit will be the intrinsic value less the price of the warrants:

Profit: 500 - 20 = 470

Now then, let’s look at a less fortunate example. If the PPS at the time of exercise is 3.000 your warrants are *out-of-the -money*:

3.000 - 3.500 = - 500

and in this case you will not benefit from exercising the warrants, as you would then lose 500 compared to simply buying the shares. Your net loss will therefore be the price of the warrants only.

0 - 20 = - 20

Hence, as you can tell, the attractiveness of the warrants is that you can leverage your investment and make a substantial profit if the share price increases. The risk, on the other hand, is that the warrants become worthless if they are not in the money – in which case you will lose your entire investment.

*Stockholm, 2023-10-26*

*Author: Katarina Strandberg*

A warrant might seem a bit more complex than a share, and therefore you might hesitate to invest in such a security. Basically, a warrant is a **derivative** since its value is derived from an underlying share value.

A warrant is a security issued directly by the company and that gives you a right to buy shares in the future for a certain price - **the strike price **- during a certain time period - **the exercise period**. The basic rationale behind the construct is that if the share price is higher than the strike price at the time of exercise, the warrant will be valuable. It is then "**in-the-money**". And if the strike price is higher than, the share price they are "**out-of-the-money**" (because then it makes more sense to buy the share outright).

So let’s look at an example.

Warrant price: 20

Exercise period: in 3 years (for 2 months)

Strike price: 3.500

Current price per share (PPS): 3.000

If the PPS is 4.000 when the exercise period comes, then the warrants will be *in**-the-money*: 4.000 - 3.500 = 500

and you will hence benefit from using the warrants to the buy shares. Your net profit will be the intrinsic value less the price of the warrants:

Profit: 500 - 20 = 470

Now then, let’s look at a less fortunate example. If the PPS at the time of exercise is 3.000 your warrants are *out-of-the -money*:

3.000 - 3.500 = - 500

and in this case you will not benefit from exercising the warrants, as you would then lose 500 compared to simply buying the shares. Your net loss will therefore be the price of the warrants only.

0 - 20 = - 20

Hence, as you can tell, the attractiveness of the warrants is that you can leverage your investment and make a substantial profit if the share price increases. The risk, on the other hand, is that the warrants become worthless if they are not in the money – in which case you will lose your entire investment.

*Stockholm, 2023-10-26*

*Author: Katarina Strandberg*