If a warrant has a conversion on a 1:1 basis,this means 1 warrant is exchangeable into 1 ordinary share.
However,many warrants convert on a 4:1 ratio.This means that 4 warrants are needed to obtain 1 ordinary share.Depending on the conversion ratio,intrinsic value must be adjusted accordingly.
It shouldn`t make a great difference whether you buy a 1:1 warrant at $1 or four 4:1 warrants at $0.25.All should show the same return if the underlying goes up.
What often happens though is that the cheaper warrants hold more appeal for buyers,and this will result in a bigger premium.
The issuing institutions are well aware of this and have taken to writing 4:1 and 5:1 warrants because they generate more premium income.As long as buyers prefer to pay $0.25 for a 4:1 issue than $1 for a 1:1 warrant,that is what will be offered.
This is only relevant if the warrant is "in the money" which means that a call with a $12.50 exercise,the underlying share must trade above $12.50 and a put with the same exercise must trade below $12.50.
If it expires "out of the money" it is worthless and you have done your dough.
If you wonder what intrinsic value is,if a call has an exercise price of $5 and the underlying is trading at $6,it has a cash value of $1 because it allows you to buy the share at $5.If it has a conversion of 4:1,each warrant will have an intrinsic value of $0.25.If the warrant is trading at $0.35 it has a premium of $0.10 because of the time remaining to expiry and the opportunity to acquire more value due to the performance of the underlying share.
If you can`t understand this,go and buy a few books and i suggest you stay right away from Warrants until you have been trading shares SUCCESSFULLY for at least 2 years,or else you will just multiply your losses.
