13.02.2020
Covered warrants (CW) are listed securities issued by financial institutions and have the same characteristics as options. A (covered) warrant gives the holder the right to buy or sell an underlying asset at a pre-determined price (strike price), before or at the expiry date. A warrant can be settled either in cash or in stock.
Each warrant is associated with an underlying stock as a basis for determing the profit/loss to its holders at expiration.
In Vietnam, only European-style, cash-settled call warrants are permitted in the first phase. After IPO, warrants will be listed on the Ho Chi Minh Stock Exchange, and will be provided liquidity by the issuer, acting as its Liquidity Provider (LP).
Example:
Each CW has a specific trading code with 8 characters
C
U
U
U
Y
Y
R
R
Call Warrant
Underlying: 3 characters for stock code
Year: Issuing year of CW
Round: number of issuing round for each underlying
Example: CVNM1901 Call warrant on VNM stock, issued in the first round in year 2019
Terms
Details
Example for CVNM1901
Premium
Costs that an investor must pay to own the warrant
20,870 VND
Strike price
The price at which the investor can exercise the warrant.
90,000 VND
Settlement price
The price to determine an amount paid to investors when the warrant is exercised.
Published at the expiry date by the issuer.
Conversion ratio
The number of warrants needed to buy one unit of the underlying stock.
1 :1
Investor needs 1 warrant to have a right to buy 1 VNM stock.
Maturity
Duration of the warrant (minimum of 3 months and maximum of 2 years)
5 months
Last trading day
The last trading day is two (02) working days before the expiry day. It is also the last day that such warrant can be traded.
In case a warrant is delisted prior to its expiry day due to the delisting of its underlying, the last trading day of that warrant will be the same as the last trading day of the underlying stock.
24/12/2019
Expiration day
The last day when the warrant holders can exercise the warrants
26/12/2019
Settlement day
The day on which the warrant holders receives payment from the issuer for in-the-money warrants.
Out-of-the-money (OTM)
When S < K
At-the-money (ATM)
When S = K
In-the-money (ITM)
When S > K
Example: The following CWs have the same terms, only differ in their Strike prices (K)
Current price of VNM stock: 200,000 VND
CVNM1901
Strike price VND 220,000
Expiry date 1/11/2019
Exercise ratio 1 : 1
Issuer HSC
OTM warrant, Price = VND 20,870
Moneyness = 10% OTM
CVNM1902
Strike price VND 200,000
Expiry date 1/11/2019
Exercise ratio 1 : 1
Issuer SSI
ATM warrant, Price = VND 29,020
Moneyness = 0%
CVNM1903
Strike price VND 180,000
Expiry date 1/11/2019
Exercise ratio 1 : 1
Issuer VCSC
ITM warrant, Price = VND 39,530
Moneyness = 10% ITM
On 01/4/2019, an investor bought CVNM1901:
CVNM1901
Strike price VND 220.000
Expiry date 1/11/19
Exercise ratio 1 : 1
Issuer HSC
Scenerio 1: The investor holds this warrant to expiration
At expiration (1/11/2019):
VNM price
Moneyness
Payment amount
Profit/Loss
% Profit/Loss
(A) 200,000 đ
OTM
None
Loss of VND 20,870
Loss of 100%
(B) 220,000 đ
ATM
None
Loss of VND 20,870
Loss of 100%
(C) 250,000 đ
ITM
250,000 – 220,000 = 30,000 đ
30,000 – 20,870 = VND 9,130 Profit /CW
Profit of 43.75% (= 9,130 / 20,870)
Investor’s maximum loss: 20,870 VND (warrant price).
Break-even point is when VNM price = 152,530VND (warrant price + exercise price)
Scenario 2: The investor sells the warrant before expiration
After 2 months, on 01/6/2019, the investor sells the warrant. The warrant price will be determined based on VNM price.
VNM Price at 01/6/2019
6/1/2019 |
Moneyness
Warrant price |
|---|
Profit / Loss |
|---|
% Profit / Loss |
|---|
Effective gearing (x) |
|---|
(A) 200,000 VND
OTM
VND 13,960
13,960 – 20,870 = VND 6,910 Loss
Loss of 33.1%
N/A
(B) 220,000 VND
ATM
VND 24,180
24,180 – 20,870 = VND 3,310 Profit
Profit of 15.86%
15.86% / 10% = 1.586 x
(C) 250,000 VND
ITM
VND 44,610
44,610 – 20,870 = VND 23,740 Profit
Profit of 113.75%
113.75% / 25% = 4.55 x