What does theoretical value mean
The theoretical value of a warrant indicates what price the warrant should actually have in purely arithmetical terms. The relationship between the strike price, the option price and the current price of the underlying asset plays a role here. In most cases, however, there are more or less significant differences between the theoretical value and the actually traded price of the warrant. How is the theoretical value of a warrant calculated? To put it in a somewhat simplified and understandable way, the theoretical value of the warrant is to be equated with the intrinsic value. Here is a brief example: Assume that a warrant contains that the holder of this call warrant can purchase share Z at a base price of 33 euros during the option period. The current price of the Z share is 37.50 euros. Based on these two figures, the theoretical value of the warrant in the present case would be EUR 4.50.
The value results from the fact that one could purchase the shares via the warrant for 4.50 euros cheaper than if one were to acquire the shares directly on the stock exchange. In practice, however, the theoretical value rarely corresponds to the current price of the warrant. On the one hand, this is due to the fact that supply and demand also have an influence on the price of the warrant and, moreover, almost every warrant also has a current value. The theoretical value of the warrant also has another meaningfulness, namely in the relationship that you can tell as an investor whether the warrant is currently expensive or rather cheap. For example, if the theoretical value is EUR 4.50, as in the present example, but the note itself is currently quoted at EUR 5.00, then the warrant would be described as expensive or "overvalued". Because the theoretical value is below the current value and the investor pays more for the note than it is worth, at least from a purely arithmetical point of view.
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