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Question 5.8: What is the gearing effect of warrants?

What is the gearing effect of warrants?

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As the price of the underlying share changes, there is a larger proportionate movement in the price of the warrant than in the price of the underlying share. In consequence, it is possible to make a greater proportionate gain (or loss) by investing in warrants than by investing in the underlying share. This is called the gearing effect of warrants.

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