Discuss Finra Series-6 Exam Topic 2 Question 117

A warrant differs from a standard call option in that:

Aa standard call option generally has a longer period to expiration than a warrant.

Bwhen a warrant is exercised, the firm whose stock is being purchased will have an increase in cash; this is not the case when a standard call option is exercised.a warrant gives the holder the right to sell shares of the underlying stock; a call option gives the holder the right to buy shares of the underlying stock.when a call option is exercised, the outstanding shares of the firm whose stock is being purchased increases; this does not occur when a warrant is exercised.

Suggested Answer: B

A warrant differs from a standard call option in that when a warrant is exercised, the firm whose stock is being purchased will have an increase in cash; this is not the case when a standard call option is exercised. Both the warrant and the call option give the holder the right to purchase shares of a firm's stock, but the writer (seller) of a warrant is the firm itself whereas the writer of a standard call option is simply another investor. Upon exercising a warrant, the investor buys the stock from the firm itself, which increases the firm's cash account. When a call option is exercised, another investor's cash account is increased. For the same reason, when a call option is exercised, nothing happens to the outstanding shares of the firm; but when a warrant is exercised, the firm's outstanding shares will increase.

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15 comments · newest first

Ma 2 months ago

I remember learning that warrants are more beneficial for firms.

Domonique 2 months ago

I lean towards B too. Cash flow matters!

Stefanie 2 months ago

A is misleading. Warrants are different from options.

Ona 2 months ago

I feel confused about the differences.

Latia 3 months ago

Agreed, B makes sense. Call options don’t do that.

Carrol 3 months ago

I think it's B. Warrants increase cash for the firm.

Angelyn 3 months ago

Just to clarify, warrants are issued by the company, right?

Ruthann 3 months ago

I disagree, call options can also affect share count when exercised.

Juliann 3 months ago

Wait, are you saying exercising a warrant increases cash for the firm? That’s interesting!

Vincent 3 months ago

Totally agree, warrants are more about raising cash for the company!

Alpha 4 months ago

A warrant usually has a longer expiration than a call option.

Earleen 4 months ago

I recall that a warrant gives the right to buy shares directly from the company, which is different from a call option. That might be important for this question.

Casey 4 months ago

I’m a bit confused about the differences in share dilution between warrants and options. I thought both affected the number of shares outstanding, but maybe not in the same way?

Merissa 4 months ago

I feel like we covered a question similar to this in class, and I think the key difference is that exercising a warrant increases the company's cash flow.

Wendell 4 months ago

I think I remember that warrants usually have a longer expiration period than standard options, but I'm not entirely sure.

Finra Series-6 Exam - Topic 2 Question 117 Discussion