COVERED WARRANTS WHAT IS COVERED WARRANTS? Covered Warrant (CW) Underlying stock (CKCS) PREMIUM (Purchase price)

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1 % INTRODUCTION ABOUT COVERED WARRANTS 1 WHAT IS COVERED WARRANTS? Covered Warrant (CW) Underlying stock (CKCS) are securities that have collateral assets issued by Securities Companies. The owner will have the right (not the obligation) to buy or sell the underlying stock at a predetermined price, before or at a specific time in the future. A stock, indexes or ETF that meets the criteria of the State Securities Committee (SSC). In the first stage, underlying stock is securities of the VN30 or HNX30 that meet the criteria of capitalization, liquidity, free float ratio... CW PREMIUM (Purchase price) Issuer (Securities Company) Investors Call or Put Option of the underlying securities Fulfill obligations - At a predetermined price. - Before or at a predetermined time. In-the-money (ITM) is a call warrant whose exercise price (exercise index) is lower than the market price (index) of the underlying securities or a put warrant whose exercise price (exercise index) is higher than the price (index) of the underlying securities. Out-of-the-money (OTM) is a call warrant whose exercise price (exercise index) is higher than the market price (index) of the underlying securities or a put warrant whose exercise price (exercise index) is lower than the price (index) of the underlying securities. At-the-money (ATM) is a call war- rant whose exercise price (exercise index) is equal to the market price (index) of the underlying securities or a put warrant whose exercise price (exercise index) is equal to the price (index) of the underlying securities. Delta is the warrant s sensitivity to a change in underlying stock price. Delta = (Change in price of warrant) (Change in price of underlying stock)

2 2 UNDERLYING SECURITES Stocks (VNM, REE, SSI, ) CW Underlying securities Market index (VNIndex, VN30, ) ETF European style: Only able to exercise at maturity date American style: Able to exercise anytime before or at maturity date (not yet available in Vietnam)

3 3 TYPE OF WARRANT CALL PUT The right to BUY the underlying securities in the future The right to SELL the underlying securities in the future Loss Profit Profit Loss Exercise price Exercise price Maximum loss = Purchase price of Warrant Underlying securities Breakprice even point Underlying securities Break- price even point Maximum loss = Purchase price of Warrant In case the actual price of underlying securities is contrary to the judgement of the Investor, the MAXIMUM LOSS is limited to the INITIAL purchase price of the warrant Type of exercising the right CW price (premium) Europe, America The amount paid by investors to buy CW Settlement method Underlying securities Cash or Underlying securities 2:1 Conversion rate 2 CW/1 share or other rates Stocks (VNM, VIC...); Indexes (VNI, VN30...); ETF SET COUNT Strike Price The price at which the CW holder has the right to buy or sell Underlying securities Period Maturity date 3-24 months Last day to execution rights Advantages Initial capital Maximum losses Leverage EASY LOW PREDETERMINED RETURN RATE Risks Transaction Issuer INSOLVENCY Premium for buying initial CW Underlying securities prices LIMIT PERIOD VOLATILE 3-24 months Leverage HIGH

4 4 Issuer (Securities Companies) - Is a qualified securities company - Performing obligations: Deposit, Payment Guarantee, Market Maker, Risk Prevention, Rights Execution - Announce the list of Underlying Securities - Validate Listing - Activity management of issuance Securities company - Market surveillance CW LISTING REGISTER SECONDARY MARKET PRIMARY MARKET TRADING METHOD Buy on first issuance 1 Issuance Securities companies or Put orders on the exchange Investors - Use stock trading accounts - No deposit required Stock Exchange Trading results at the end of the day Vietnam Securities Depository (VSD) - Clearing - TCW depository - Rights Execution

5 5 LEVERAGE OF COVERED WARRANTS Capital = VND10 mn 1,000 A stocks (price of VND10,000/share) 5,000 Call CWs (Underlying stocks: A, price of VND2,000/CW, exercise ratio: 1:1, Exercise price VND10,000) Leverage advantage A stock price increases to VND14,000 Leverage disadvantage A stock price decreases to VND6,000 A stock: 40% (Profit = 14,000 10,000 = 4,000/share x 1,000 shares) CW: 100% (Profit = 14,000 10,000 2,000 = 2,000/CW x 5,000 CWs) A stock: -40% (Loss = 10,000 6,000 = 4,000/share x 1,000 shares) CW: -100% (Loss due to VND10 million of premium) With the same volatility as underlying stocks, CWs magnify profit and loss compared to investing in the underlying stocks directly.

6 6 MONEYNESS OF COVERED WARRANTS CALL CW: S > X ITM PUT CW: S < X Moneyness of Covered Warrant CALL CW: S = X ATM PUT CW: S = X CALL CW: S < X OTM PUT CW: S > X S Market price: Underlying stock price on the spot market X Exercise price/strike price: Underlying stock price when exercising warrants

7 7 PRICE STRUCTURE OF COVERED WARRANTS <Time value> Time value is the premium over the current intrinsic value that is paid for the probability that the option will increase in value in future (in the remaining time to maturity). CW price Difficult to price. <Intrinsic value> Difference between current market price and exercise price. Current Underlying Exercise market stock price price price Easy to price, even intuitively

8 8 FACTORS THAT AFFECT PRICE OF CW (CONT.) Affecting Factors Call CW price Put CW price Underlying stock price Exercise price Time to maturity Volatility of underlying stock price Interest rate : Same direction fluctuation : Opposite direction fluctuation

9 9 BUSINESS PROCESS OF COVERED WARRANTS Offering Listing Issuing process Trading on exchange Payment for transaction Transaction process Market making CW Issuers Risk prevention Exercise and payment for exercise Settlement process

10 10 OFFERING AND DISTRIBUTING COVERED WARRANTS Stock market and Derivative market 4. Hedging 1. Offering and listing of CW Investors Issuer 2. Distribution 3. Trading 5. Trading Investors

11 11 DIRECT LISTING Example: Total number of registered offerings: 5 million CWs. Number of offerings for investors at pre-listing: 1 million CWs. Number of offerings through direct listing: 4 million CWs. Offering 5 million Issuance 5 million 1 mn 4 mn Direct listing Register/ Custody of 5 million Investors Proprietary trading account of securities company Trading on Stock Exchange Listing 5 million Sell order Offering Quote

12 13 GLOSSARY & NOTE An issuer of a warrant is a securities company that issues a warrant. A warrant holder is an investor who holds the warrant and a creditor of the debt partially covered by the issuer, and other than the issuer of the warrant. A depository bank deposits and super- vises the asset(s) that an issuer of a warrant margins as a payment security for the warrants issued. Such bank shall not be affiliated to the issuer as per the legal regulations on securities. Exercise price is the price at which a holder of a warrant has the right to buy (call) or sell (put) the underlying securities (a stock or ETF certificate) to the issuer or on which the issuer bases to calculate the payout to the holder of the warrant. Conversion ratio indicates the quantity of warrants required to convert into one unit of the underlying securities. Multiplier is the sum of money equal to one index point and constitutes the calculation of a payout value upon the exercise of a warrant according to the underlying securities being the stock indices. Maturity date is the last date that a holder of a warrant can exercise the warrant. Outstanding warrants are warrants that have not expired and are being held by (a) holder(s).! CW is a flexible financial investment tool that can meet the different investment strategies of investors, to achieve the highest investment efficiency. You need to find out about CW products before investing Understand underlying securities and risks Select the appropriate CW type Regularly monitor the market developments to make accurate decisions

13 14 CONTACT For inquiries, please contact (028) (TP.HCM); (024) (Hà Nội) Customer Service & Products Development Dept. Viet Capital Securities Joint Stock Company (VCSC) Vinatex Buliding, 1st & 3rd Floor, 10 Nguyen Hue, District 1, HCMC T (028) F (28) Hot line Hoặc direct line