Currency warrants are relatively new to the international Forex market.
They function like puts or calls, depending on whether it is a purchase warrant or a warrant to sell, but they have longer durations, usually between one and five years until they expire.
They can be purchased to take a position on a currency index or on a currency pair. Warrants were originally issued by corporations, giving investors the ability to redeem the warrant like a call option to purchase a stock at a strike price.
The difference between a stock warrant and a regular call option was that warrants had longer durations until expiration and the stock would come directly from the issuing company instead of the open market, so they could potentially dilute the existing shares in the market if many shares were issued at once. Currency warrants are slightly different.
They can take the form of puts or calls, and the company issuing the warrants is an investment bank rather than a traditional corporation. As with other warrants, currency warrants have longer durations until expiration and can be traded in the secondary market.
Currency warrants can overlie a basket or index of currencies or a single currency pair. The difference in the exchange rates, or of the index value, will give the warrant it’s potential value.
Unlike other call and put options, warrants are a little less uniform in their design. Investors can use warrants as the legs of a strangle, straddle, or other typical options strategy. Investors can use these as hedges against unfavorable movements in the exchange rate or as speculative instruments.