- WHAT IS COVERED WARRANT?
Contents |
Description |
Exchange market |
Trading on the stock exchange market |
Product’s designs and terms |
By the issuer which is the securities company |
Clearing transaction |
T+2 (same as stocks) |
Unit price |
10 đ |
Reference price |
Covered warrant reference price +/- (amplitude of base price fluctuations * reference price of the underlying stocks) * 1 / conversion ratio |
Warrant price (fee) |
The amount investors pay for the right to buy |
Exercise price |
The price when exercise the right to buy or sell the underlying stocks at maturity date |
Maturity date |
The last day to exercise the rights of the covered warrant |
Maturity term |
3-24 months |
Type of exercise rights |
Europe or America (applied European style for the initially time) |
Payment method |
Cash or underlying stocks (applied cash payment for the initially time) |
BENEFITS OF COVERED WARRANT:
- Easy transaction and payment
Covered warrant is traded and has some features such as time, transaction method, payment, etc… similar to a stock trading on the stock exchange market, therefor Investors can trade easily on their regular trading account.
- Low initial investment:
Initial investment is the purchase price that investors must pay, which is much lower than the cost of buying the underlying stock.
- Fixed maximum loss
The maximum loss that the investor has to pay when the underlying stock price fluctuates unexpectedly is known in advance. Investor may not exercise the rights and bear the maximum loss equal to the cost of acquiring rights.
- High margin ratio:
The product contains a very high margin ratio. “IN THEORY, PROFITS ARE UNLIMITED” investors have the opportunity to make profit from the underlying stock in the future without paying the whole amount equal to the value of the stock today.
POTENTIAL RISKS OF COVERED WARRANT:
- Issued securities company loses the ability to repay:
The risk may arise when the issuer is bankrupt or has financial difficulties that lead to the inability to fulfill its obligations to pay the investors at the maturity date when the investors decide to exercise the rights.
- Lose the initial purchasing fee:
The risk may arise when the underlying stocks fluctuate unexpectedly., the investors will lose all the initial purchasing fee.
- Underlying stock price fluctuates:
Price of the underlying stock will affect the movement of covered warrant’s price, even if the underlying stock price fluctuates unexpectedly will lead to the fact that the covered warrant may be worthless and cannot perform at the maturity.
- Limited life cycle:
One feature of the covered warrant is that it has maturity terms (at least 3 months and up to 2 years). After the maturity date the covered warrant will not be traded and no longer valuable.
- High margin ratio:
High margin ratio is a double-edged knife for investors. If the market moves as expected the investor may be very profitable, however if the opposite direction, the investor may lose all the initial investment.