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Covered warrant (CW) 09.02.2022

The basic knowledge of covered warrants that every investor needs to know

Covered Warrant (CW) is a type of investment security that gives the holder the right, but not obligation, to buy or sell an underlying asset at a specified price on or before a specified date in the future.

CONTENTS

What is the Covered warrant (CW)?

Basic information of a CW

The example of CW

Compare CW with Stocks

Compare CW with Future contracts

Pros and cons of investing in CW

How to start investing?

What is the Covered warrant (CW)?

A covered warrant is a type of warrant where the issuer is a financial institution. When issuing warrants to investors, the issuer will take security measures by purchasing the underlying securities on the market.
There are two types of CW:
- Call warrants (profit in the direction of the increase of the underlying securities - deployed)
- Put warrants (profit in the direction of the decrease of the underlying securities - Not yet deployed)
At the current time, according to the regulations of the Securities Commission and the exchange, securities companies are only allowed to issue Put warrants, exercised by European style and payment by cash

Basic information of a CW

No	The parameters	Meaning
1	Type of CW	Buy CW (Call)/Sell CW (Put). At the current time, only Buy CW (Call) is allowed to trade in Vietnam
2	Underlying asset	The stocks on the market in the list of VNX50, VN30, and HNX30, selected by the issuer as the reference basis for guaranteed CW
3	Lifespan of CW	The circulating time of the CW minimum is 3 months; the maximum is 24 months.
4	Last trading day	The last day that CW can be traded (2 days before the maturity date)
5	Maturity date	The last day that the CW owner can exercise CW
6	The payment method of settlement	Cash payment is the difference between the exercise price and the underlying securities price
7	Exercise price	Price for investors to execute the call of underlying securities when the CW expires. This price is predetermined at the time of purchase of the warrant and remains unchanged over time.
8	CW price	The amount of money investor spends to buy CW
9	Payment price	The average of 5 price trading sessions before the maturity date of the underlying securities.
10	Form exercise of rights	Stock or Cash
11	Volume CW released	Minimum 1.000.000 CW
12	Conversion rate	The number of CWs that investors need in exchange for a underlying stock.
13	Style	European/ American

The example of CW

Call Warrants

CW from issuer

	Exercise price $$$
	– – – – – – – – – – –⟩
	⟨– – – – – – – – – – –
	Underlying securities or cash

For example, the CW is as follows:

Issuer	HSC
Type of CW	Call Warrants
Type of underlying Stock	VNM
Current stock price	100 VND
CW price	10 VND
Exercise price	100 VND
Lifespan of CW	06 months
Style	European

Stock price on maturity date	Gain/ Loss at maturity
120 VND	10
110 VND	0
100 VND	-10
80 VND	-10

Compare CW with Stocks

The common

Trading market

The different

	CW	Stock
Issuer	Securities Company	Business
Time	From 3 months – 2 years	Until the enterprise is dissolved, delisted
Trading	Fee rights	Buying stocks
Securities company provides margin	Not allowed	Allowed
Rights to business (Such as voting rights, the right to receive dividends, the right to buy additional issued shares, the right to receive bonus shares for the underlying stock issuer, ....)	Don’t have any rights. All company’s events related to the CW's underlying stock (if any) arise, the warrant will be adjusted through the execution price and conversion ratio.	Full rights of shareholders

Compare CW with Future contracts

The common

Value volatility based on underlying securities
High leverage

The different

	CW	Future contracts
Tổ chức phát hành	Securities Company	HNX
Position for investors	Call and Put warrant	Long/Short
Trading period	T+2	T+0
Liquidity	Has market makers.	has no market maker

Pros and cons of investing in CW

Pros

Cons

Low initial capital and trading fee: The CW’s investor only needs to spend a small amount of money to receive the same profitability as when investing in stocks.
Limit loss: Maximum loss equals to the premium price that was paid.
High leverage: Leverage is the natural characteristic of the warranty product.
No margin required: There is no Call Margin pressure when investing in a warrant.
Liquidity is guaranteed by market makers: According to the rules, the issuer is required to create liquidity for the market.

Issuer risk: The risk may arise when the issuer goes bankrupt or has financial difficulties leading to the failure to pay investors when the CW matures, or the investor decides to exercise the rights.
Limited lifespan: Warrants always have a limited lifespan. After the maturity date, CW is no longer valid.
Leverage risk: The price fluctuation range of CW is much larger than stocks