Covered Warrant

1. What is a Covered Warrant?

• A Covered Warrant (CW) is a type of security backed by collateral and issued by a securities company that allows the holder to receive the difference between the exercise price and the settlement price upon exercise.
• At this stage, only the following type of CW is available in the Vietnamese market:
  • Warrant type: Call warrant
  • Exercise style: European-style, meaning that the warrant holder may exercise the right only on the expiration date.
  • Settlement method: Cash settlement.

• CW are listed on the stock exchange (HOSE), have their own ticker symbols (assigned by VSDC upon registration), and are traded in a manner similar to the underlying securities.

2. What basic information about CWs should investors know?

Information	Meaning
Underlying Security	The security used as the underlying asset of the warrant, selected by Pinetree from the list of eligible securities periodically published by HOSE.
Warrant Price	The amount an investor must pay to own a CW. At IPO: Pinetree issues the CW at a predetermined price. After listing: The price fluctuates based on movements in the underlying security’s price.
Exercise Price	The price set by Pinetree at the outset and used to determine the cash payment to the warrant holder.
Conversion Ratio	The ratio of the number of warrants required to convert into one unit of the underlying security. The conversion ratio is rounded to four decimal places.
Warrant Term	3–24 months
First Trading Date	The first day on which the CW is permitted to trade on the stock exchange.
Expiration Date	The date on which the Covered Warrant is exercised. After this date, the issuer will make a payment for in-the-money (ITM) warrants.
Last Trading Date	The trading day that is two business days before the expiration date and the last day on which the warrant may be traded.
Settlement Price	The average closing price of the underlying stock over the five consecutive trading sessions preceding the expiration date (excluding the expiration date).
Trading Method	After listing: CWs are bought and sold in the same way as the underlying securities; the settlement cycle for CWs and cash is T+1.5.

3. What are the statuses of a Call Warrant?

• The warrant status indicates the relationship between the exercise price and the current price of the underlying security and is used to determine whether the warrant will be exercised.
• The underlying security price used as a reference affects the investor’s profit or loss at expiration as follows (assuming a 1:1 conversion ratio):

Status	At Expiration	Settlement
Investor Makes a Profit	Settlement Price > Exercise Price + Warrant Price	Settlement amount exceeds the initial purchase price of the warrant
Investor Breaks Even	Settlement Price = Exercise Price + Warrant Price	Settlement amount equals the initial purchase price of the warrant
Investor Incurs a Partial Loss	Exercise Price < Settlement Price < Exercise Price + Warrant Price	Settlement amount is less than the initial purchase price of the warrant
Investor Loses the Entire Investment	Settlement Price ≤ Exercise Price	Settlement amount = 0

• The investor’s profit or loss from trading CWs before expiration is calculated in the same way as for the underlying securities.

4. Value of a CW

Before expiration, the value of a CW consists of intrinsic value and time value.

In which:

• Intrinsic value: The difference between the price of the underlying security and the warrant’s exercise price, adjusted for the conversion ratio. Only ITM warrants (underlying security price > exercise price) have intrinsic value; ATM/OTM warrants have zero intrinsic value. This value is affected by changes in the underlying security price.
• Time value: The difference between the market price of the warrant and its intrinsic value. The warrant’s time value declines over time and reaches zero on the expiration date.

5. CW Example

Example: Investor A purchases 30,000 call warrants on FPT shares with the following information:

Underlying Security	FPT
Conversion Ratio	5:1
Exercise Price	VND 75,000
Current FPT Price	VND 67,000
Warrant Term	4 months
Warrant Price	VND 1,000/CW

Total amount Investor A must pay to purchase 30,000 warrants = 30,000 CW × VND 1,000 = VND 30,000,000

• Assume that after two months, FPT is trading at VND 85,000 and the market price of the warrant is VND 2,600/CW. Investor A can realize a profit at this point by selling the CWs on the secondary market, with the return calculated as follows = Number of CWs × (selling price – purchase price) = 30,000 CW × (2,600 – 1,000) = VND 48,000,000
• If Investor A holds the warrants until expiration, the break-even point is Exercise Price + (Warrant Price × Conversion Ratio) = 75,000 + (1,000 × 5) = VND 80,000. Two scenarios may occur:
  • Assume the settlement price (the average closing price of FPT over the five consecutive sessions preceding the expiration date) is VND 86,000. The issuer will pay Investor A the following amount (before taxes and fees) = (Number of CWs / Conversion Ratio) × (Settlement Price – Exercise Price) = (30,000 / 5) × (86,000 – 75,000) = VND 66,000,000. Investor A’s return = Proceeds – Initial investment = 66,000,000 – 30,000,000 = VND 36,000,000
  • Assume that at expiration, the calculated and published settlement price of the CW is ≤ VND 75,000 (the exercise price). Investor A will not receive any payment from the issuer and will lose the entire initial investment of VND 30,000,000 used to purchase the CWs.

6. Applicable Tax Schedule

Before Expiration	On the Expiration Date
Applies to the seller in all CW transactions	Applies to ITM CWs that are settled
Tax = Matched Price × Quantity × 0.1%	Tax = Settlement Price × (Quantity / Conversion Ratio) × 0.1%

7. Factors Affecting the Price of a CW

When trading CWs in the market, in addition to supply and demand, the warrant price is also affected by other specific factors, including:

• Time to expiration
• Price of the underlying security
• Volatility of the underlying security
• Exercise price
• Risk-free interest rate

Among these factors, the volatility of the underlying security is the most difficult to determine and has the greatest impact; it depends on the experience of investors and securities companies in the market.

8. How is a CW holder different from a shareholder?

An investor holding a CW whose underlying security is a stock does not have any rights in relation to the company that a shareholder of that stock would have. A CW holder does not have voting rights, dividend rights, rights to purchase additional shares, or rights to receive bonus shares in the company issuing the underlying stock, etc. Any corporate actions relating to the underlying stock of a CW, if they occur, will be reflected through adjustments to the exercise price and conversion ratio of the CW.

9. How is the settlement price determined?

• The settlement price of a warrant upon exercise is the average closing price of the underlying stock over the five consecutive trading days preceding the expiration date, excluding the expiration date. If the price of the underlying security is adjusted in accordance with the stock exchange’s regulations during the five consecutive trading days preceding the expiration date, the closing prices of the underlying stock on the days before the ex-rights date will be adjusted accordingly.
• The issuer determines the settlement price used as the basis for calculating the settlement amount and announces that price for outstanding warrants on the expiration date.

10. How is the CW price affected when the underlying security has a corporate action?

• Unlike stocks, the market price of a CW is not adjusted when the underlying security is subject to a corporate action (dividends, additional share issuance, etc.). However, the exercise price and conversion ratio of the will be adjusted.
• Formula for adjusting the exercise price and conversion ratio:
  • New exercise price = Old exercise price × (adjusted reference price of the underlying security on the ex-rights date / unadjusted reference price of the underlying security on the ex-rights date)
  • New conversion ratio = Old conversion ratio × (adjusted reference price of the underlying security on the ex-rights date / unadjusted reference price of the underlying security on the ex-rights date).

11. How are the price ceilings and floors for CWs determined?

– The trading band for CWs is not fixed at 7%, 10%, etc., as it is for stocks.

– The CW trading band is calculated as follows:

CW ceiling / floor price = CW reference price +/- (Absolute price fluctuation limit of the underlying security / Conversion ratio)

If the CW floor price calculated using the above formula is less than VND 10, the floor price is set at VND 10.

12. Can investors sell CWs before expiration?

Yes. After CWs are listed on the exchange, investors may choose to sell the CWs on the exchange or hold them until expiration to receive payment from the securities company (if the CWs are in-the-money).

13. Are investors allowed to trade CWs on margin?

No. Under regulations issued by the Ministry of Finance, investors are not permitted to trade Covered Warrants on margin. This restriction is intended to limit risk because CWs are highly leveraged products.

14. How can investors buy ?

Investors can buy CWs in two ways:

• First, investors may subscribe for CWs when the issuer offers them in the primary market.
• Second, investors may buy CWs in the secondary market (after the CWs have been listed and begun trading on the Stock Exchange).

15. Can trading in be suspended?

Similar to stocks, trading in CWs may also be suspended in the following cases:

• Trading in the underlying security of the CW is suspended.
• A force majeure event caused by a natural disaster, fire, or a technical incident affecting the trading system or settlement system.
• Other cases that the Stock Exchange deems necessary to protect investors.

16. What are the risks of investing in CWs?

CWs are high-risk financial instruments. Investors should understand and consider the risks before trading. CWs involve the following risks:

• Risk of losing the entire amount invested in CWs if the underlying asset price does not move as expected
• Limited life: A warrant has value only during its lifetime. After the expiration date, the warrants will have no value.
• The time value of a warrant declines over time: even if other factors (underlying asset price and price volatility) remain unchanged, the warrant price still falls as the expiration date approaches.
• Risk relating to the issuer’s market-making capacity.

17. What are the benefits of holding CWs?

• Compared with stocks, CWs are highly leveraged products, so investors need to invest only a small amount of capital in CWs to achieve an exposure similar to trading stocks with a much larger amount of capital.
• Compared with futures contracts, CWs are also leveraged products, but investors are not exposed to margin calls as they are when trading futures or buying stocks on margin.
• Limited risk (the maximum loss is the amount paid to purchase the CWs).
• Good liquidity because of market making.

18. How does exercise take place?

• On the expiration date, investors holding ITM CWs (Settlement Price > Exercise Price) receive a cash payment equal to the difference between the settlement price and the exercise price (adjusted for the conversion ratio).
• Payment to investors is completed within five business days from the expiration date.

19. Which organization acts as the market maker for CWs?

CWs are products that must have a market maker to provide liquidity to the market, and under the regulations, the issuer of the CWs is also the market maker.