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13.02.2020

Knowledge of CWs

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:

CMWG1901
(MWG Call Warrant)
  • The CMWG1901 warrant gives the holders the right to buy MWG stock at the price of 90,000VND at the expiry date. Investor needs 5 warrants to buy 1 stock of MWG.  
  • When exercising their rights at the expiry date (26/12/2019), investors will only receive cash-settled payments if the warrants expired in-the-money.     
  • Warrant’s price will vary depending on different factors, the most important of which is the price of underlying stock MWG and the remaining time until expiration.
Strike price              90.000VND
Expiry date              26/12/19
Conversion ratio      5 : 1
Issuer                       HSC
How to read CW trading codes

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

  • T: 05 months
  • VNM price at 01/4/2019: S = VND 200,000
  • Warrant premium: VND 20,870

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

  • Low initial capital
  • High leverage
  • Low transaction fee
  • Upside potential & Limited loss
  • Better liquidity from liquidity provider
  • No cap on foreign ownership share
  •  Settlement risk from issuer (Credit Risk)
  • Leverage risk: change in warrant’s price is much greater than the change in underlying asset price  
  • Limited lifespan: a warrant only has value during its lifetime. After expiration, all warrants will be worthless.
  • Time value decreases overtime: Even if other factors (price of underlying asset, volatility, …) remain unchanged, a warrant still depreciates in price when the expiry day comes closer due to the loss of time value.
  • Liquidity risk on secondary market
  • Market-making risk of issuer
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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