Final answer:
Statement IV is true, as it makes sense to exercise a warrant when the stock price exceeds the exercise price. Option 4
Step-by-step explanation:
Warrants are financial instruments granted by a company that give the holder the right to purchase a set number of the company's shares at a specified price (exercise price or strike price) before the warrant expires. The nature of warrants in relation to their exercise price and market price of the underlying stock gives insight into their value and exercise strategy for investors.
Statement I: Warrants are typically issued with an exercise price that is higher than the stock's current market price. This statement is generally FALSE. Warrants are usually issued with an exercise price at or above the current market price, not always distinctly higher and often may be at-the-money or slightly out-of-the-money depending on the issuer's strategy.
Statement II: Warrants are typically issued with an exercise price that is lower than the stock's current market price. This statement is generally FALSE. Warrants are not commonly issued with an exercise price lower than the stock's market price, as this would provide immediate, unrealized gain and not serve as an incentive for investors.
Statement III: Warrants would be exercised when the stock's market price is below the warrant strike price. This statement is FALSE. Exercising a warrant when the market price is below the strike price would not be rational as it would mean buying stock at a higher price than the market price and does not provide any immediate gain.
Statement IV: Warrants would be exercised when the stock's market price is above the warrant strike price. This statement is TRUE. Exercising a warrant is advantageous when the current market price of the stock is above the exercise price of the warrant, which allows the holder to buy the stock at a discount to the current market value and potentially sell it for an immediate profit or hold it as an investment. Option 4