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) |
|
| Strike price 90.000VND Expiry date 26/12/19 Conversion ratio 5 : 1 Issuer HSC |
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. |
6/1/2019 |
|
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 |
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 |
- 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