Hedging (warrants)
Offsetting a risk position through the purchase of a warrant.If an investor expects that stock prices will fall, he can hedge his stock portfolio by acquiring put warrants that entitle him to sell his shares at a predetermined price – e.g. at the current market price – within the period stipulated in the warrant contract. In doing so, he will prevent the value of his portfolio from decreasing. Although the investor must pay a price, in the form of a warrant premium, to protect his assets, this price is far lower than the loss he would incur as a result of the expected downturn in the market.