What is the difference between American and European style warrants?

When we talk about the “style” of a warrant we are referring to when the warrant can be exercised.

Equity Warrants are very similar to equity options.  Much like equity options, warrants can be either call warrants or put warrants.  A call warrant gives the holder the right to buy the underlying security at some point in the future and a put warrant gives the holder the right to sell the underlying security at some point in the future.

Much like American-style options, an American warrant allows the warrant holder to exercise their right to buy or sell the underlying on any date up until expiry.  It therefore follows that European-style warrants can only be exercised on a specified date.

Occasionally warrants can be European style up to a certain date and then have the exercise features of an American warrant until maturity, but generally this is not common.  The terms of a warrant series will set out how you can exercise the warrant.

For an issuer of warrants, the European style can be simpler because exercise occurs only at the maturity date of the warrant.  As an investor, European style warrants are also cheaper than American style warrants, simply because of the limitations around when you can exercise your warrants and take delivery of the underlying shares.

It is important to note that the exercise style of a warrant has no affect on the tradability of the warrant, meaning you can buy and sell them at any time on the secondary market.

For more information

For further information on Instalment Warrants, visit the Australian Stock Exchange website www.asx.com.au.  The ASX have a booklet titled “Understanding Trading and Investment Warrants” which is designed to give you a comprehensive understanding of the different types of warrants and how they work.  A number of Instalment Warrant strategies are also available for download.