Currency warrants are a type of trading warrant. They offer exposure to an underlying currency by giving you the right to exchange an amount of foreign currency for Australian dollars on or before the expiry date. Reasons to invest in currency warrants include leverage and hedging a currency transaction.
- The value of the warrant rises and falls in line with movements in the exchange rate. For example, you can benefit from an increase in the AUD/USD exchange rate with a AUD/USD call warrant, and from a decrease in the AUD/USD exchange rate with a put warrant.
- You may elect to receive a cash payment upon exercise of the warrants (cash settlement) rather than take delivery of the foreign currency.
Example of a currency warrant
|Warrant type||Call warrant|
|Expiry date||30 December 2009|
|Exercise level||$US 7.60 US dollars|
You have the right to pay $US7.60 and receive $A10.00 on 30 December 2009 upon exercise of the warrant. For example, if at expiry the Australian dollar is trading at $US0.78 you will be entitled to receive a cash payment equal to $0.256 per warrant.
The cash payment, also known as intrinsic value, is calculated using the following formula:
Intrinsic value = [(closing currency level - exercise price (AUD)) x currency received] / closing currency level
For example = [(0.78 - 0.76) x $10.00 ] / 0.78
To learn more about currency warrants, visit our online warrants class.