Risk Latte - Installment Warrants

Installment Warrants

Rahul Bhattacharya
Feb 15, 2005

One of the first installment warrants were issued by Bankers Trust in the early 1990s. On April 14, 1994 , Bankers Trust Canada issued installment put warrants on the TSE-35 index. These warrants had the following structure: The investor was required to pay $2.50 on the purchase date. On year later on April 14, 1995 the investor may choose to invest another $2.50 and receive an American put option on the TSE-35, or not pay anything and let the option expire worthless. A total of 2.8 million warrants were sold and the product became very popular with the retail investors.

Retail investors liked this product for two reasons: first, because it gave then an option to buy an option (a compound option) and thereby pay only half the premium up front and secondly, there was leverage attached to it. If the warrants went up by $0.50 in the first year it represents a 10% increase on the full purchase price of $5.00 however, on an installment price of $2.50 the increase represented 20%.

(Source: Compound Option & Chooser Options by Israel Nelken)

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