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A warrant is a financial derivative that grants the holder the right, but not the obligation, to buy or sell a security, typically a company's stock, at a predetermined price before a specified expiration date. They do not pay dividends or provide voting rights, and when exercised, they result in the issuance of new stock, diluting the ownership percentage of existing shareholders.
Warrant pricing considers factors like the premium, exercise price, type (American or European), and market conditions. The Black Scholes model is frequently used, factoring in the underlying asset's price, time until expiration, and volatility. It's crucial for investors to understand how warrants differ from options—warrants can dilute shareholder equity upon exercise, while options, traded between investors, do not affect a company’s stock directly.
Here are the advantages and disadvantages of warrants:
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