The reason for buying warrants is the direct gearing they give to share prices in the sector. For pounds 11.10 investors can buy 10 warrants that give exposure to a basket of shares worth pounds 84. A rule of thumb is that a 25 per cent rise in the basket would double your money on the warrant.
On the other hand, there is some headroom to make up first. The strike price at which the warrants can be exercised is 5 per cent above last night's closing price for the basket. As always, the sponsor has taken a hefty margin for itself.
Warburg was not the first into the market, though it now claims to have done the most sectors, with warrants for banks, pharmaceuticals, food retailers, water and business services. Salomon, BZW, Credit Lyonnais and Societe Generale have also been active.
In the US and on the Continent, there is substantial private investor interest in warrants, which Warburg claims is being mirrored here. To buy now, however, requires faith that the market is bottoming and that the interest rate shocks of the next year or so are priced into shares already.Reuse content