Covered and Structured Warrants · Warrants & Rights
Call and put warrants can use entitlement ratios and currency conversion in their settlement formulas. A payoff calculation should follow the sequence in the contract rather than mix quoted currencies.
Write the payoff in the underlying currency
For a simple call, take the positive difference between the contractual reference price and strike. For a put, reverse the subtraction. Multiply by the entitlement to obtain the amount per warrant before conversion. Use the official reference definition, not an unrelated live quote.
Convert in the correct direction
Assume a call references a US dollar share, has a $70 strike and a $78 settlement reference. Each warrant represents 0.1 share. The initial payoff is $0.80. If the contract converts at 7.8 local currency units per US dollar, the gross local currency amount is 6.24.
For a put on the same strike with a $62 reference, the same positive $8 difference also produces $0.80 before conversion. Neither calculation includes the premium paid. Profit requires comparing final proceeds with the original purchase cost in a consistent reporting currency.
Check for fixed conversion arrangements
Some products use a specified conversion factor or a quanto mechanism rather than the spot exchange rate you observe. Others expose the holder to currency movements during the life of the warrant or at settlement. The trading currency alone does not resolve this.
If a floating conversion rate changes from 7.8 to 7.4 in the example, $0.80 becomes 5.92 local units. A fixed contractual conversion could behave differently. Do not add or remove currency risk based on the product name alone.
Keep price and profit calculations separate
Record underlying currency, warrant trading currency, settlement currency and account reporting currency. Include conversion charges when assessing realized results. A positive underlying payoff can still leave a net loss after premium, spreads, fees and unfavorable currency conversion.
Try it yourself
A put has an $80 strike, a $74 reference, a 0.2 entitlement and a conversion rate of 1.5 settlement units per dollar. What is its gross payoff?
Show the worked answer
The $6 difference multiplied by 0.2 gives $1.20. Converting at 1.5 gives 1.80 settlement currency units per warrant before expenses and premium.
Further reading
Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.
