Question

An investor has an amount of R18 000 available for investment in Orico. Orico’s shares trade at R18 per share and the warrants are trading at R24 per warrant. Each warrant entitles the holder to purchase two shares at R16.20 each. The investor can either invest his or her R18 000 by buying shares or by buying warrants. If the share price increases by 90c, and capital gains tax and brokerage fees are ignored, the difference in the investor’s gains if he or she invested in shares as opposed to warrants would be

Answer 1

A stock warrant gives an investor the right/option to buy/sell a stock at a pre-specified price. This allows the warrant buyer to make gains according to market movements. If the exercise price of the warrant is favorable with respect to the market price, the investor can exercise their right to buy/sell the shares as per the warrant guidelines.

Given,

Investment amount = R18,000

Market price of each share = R18

Thus, number of shares the investor can purchase = R18,000/R18 = 1000

Exercise price of each warrant = R24

Thus, number of warrant the investor can purchase = R18,000/R24 = 750

Number of shares per warrant = 2

Total number of shares under this contract = 2*750 = 1500

Gain in share price = 90c

If the investor invested in shares, gains = 90c*1000 = R900

If the investor invested in warrants, gains = 90c*1500 = R1350

Thus, the difference in gains in the above two cases = R1350 – R900 = R600