J.P. Morgan Thailand DW41


  • 1. What is a Derivative Warrant? What is the difference between a Call DW and a Put DW?

    Derivative Warrants or “DW” is the financial instrument which is listed in the Stock Exchange of Thailand. It gives the right for investors to buy or sell the underlying asset (either single stock or index) with pre-determined price (exercise price) and quantity (exercise ratio) within limited period (time to maturity) at the exercise date. DW gives the leverage around 3-20x to investors because the price or premium of DW is significantly low compared to underlying price. Normally, investors will use DW as the trading instrument but not hold DW until maturity and exercise the right.

    Call DW is the right to buy the underlying. Therefore, CALL DW price moves on the same direction with the underlying price. There is high demand on CALL DW during bullish view

    Put DW is the right to sell the underlying. Therefore, PUT DW price moves on the opposite direction with the underlying price. There is high demand on CALL DW during bearish view.

  • 2. What is the difference between a Derivative Warrant (DW) and a Warrant?

    DW is issued by Brokers in order to provide alternative ways to get the exposure in the underlying. It does not impact the total number of outstanding shares because all DW are settled in cash settlement only at the exercise date.

    Warrant or Company Warrant is issued by listed company in order support company equity funding. It leads to increase in total number of outstanding shares because all warrants are physical settlements on quarterly basis.

  • 3. What is the meaning of terms In-the-Money (ITM), At-the-Money (ATM) and Out-of-the-Money (OTM)?

    During every single point in time, DW can be categorized into 3 statuses;

    • 1. In-the-Money (ITM) : Call DW Underlying Price > Exercise Price or Put DW Underlying Price < Exercise Price DW Price is high, Sensitivity with underlying price is high, Time decay is low, and Effective Gearing is low

    • 2. At-the-Money (ATM): Call DW Underlying Price = Exercise Price or Put DW Underlying Price = Exercise Price The highest sensitivity with underlying price with very high time decay.

    • 3. Out-of-the-Money (OTM) Call DW Underlying Price < Exercise Price or Put DW Underlying Price > Exercise Price DW Price is low, Sensitivity with underlying price is low, Time decay is high, and Effective Gearing is high

  • 4. What is the naming convention of Derivative Warrant (DW) symbol?

    Investors can refer to http://jpthai.dbpower.com.hk/en/knowledge/knowledge_basic.php for the naming convention of DW symbol.

  • 5. How can I start to trade Derivative Warrant (DW)?

    Only equity account is required. Investors can open an equity account with any broker and start to trade JPMorgan DW41 derivative warrants – just like trading stocks.

  • 6. Is there any transaction cost in trading Derivative Warrants (DW)?

    Same brokerage commission and exchange fee are applied as same as underlying stock. Only cash settlement proceed during exercise date is subjected as personal income tax.

  • 7. Does trading in Derivative Warrants (DW) require the investors to deposit initial margin (IM) and/or variable margin (Margin)?

    Unlike trading Futures and Options, DW is not required IM and no margin call.

  • 8. Can investors short-sell Derivative Warrants (DW)?

    Investors can’t short sell DW.

  • 9. Do investors normally invest and hold on to Derivative Warrants (DW) until maturity?

    No. Investors typically treat DW as a short-term trading instrument and will sell DW before maturity. This is primarily because of the natural decrease in the price of DW over time as maturity approaches (see “Time Value” http://jpthai.dbpower.com.hk/en/knowledge/knowledge_basic.php)

  • 10. Why does the quoting price for a Call Derivative Warrant (DW) decreases more than 1% when the price of the underlying only dropped by exactly 1% ?

    Derivative warrants (DW) are leveraged investment instruments which provide gearing effect for the investors. This means the gains and losses from investing in DWs are magnified relative to the underlying stock’s performance. For example, if the effective gearing of a DW is 5x, it means that the returns from investing in this particular DW is approximately 5 times that of the underlying stock – when the underlying drops 1%, the price of the DW will decrease by approximately 5% (or increase by 5% if this is a Put DW).

    Effective gearing information for JPMorgan DWs can be found here [link to info page]. It is important to note that the DW price change implied by its effective gearing is only an approximation. Effective gearing of a particular DW is highly dynamic in nature and the actual change in the price of DW may be slightly different from that implied by the effective gearing.

  • 11. Why derivative warrants (DW) from different issuers having identical terms (same underlying, same maturity, same exercise price and same exercise ratio) have different price?

    As mentioned in http://jpthai.dbpower.com.hk/en/knowledge/knowledge_basic.php, the theoretical price of derivative warrants (DW) depends on other pricing variables (in addition to the warrant features), namely (1) the volatility of the underlying price (2) assumed interest rate. Different issuers may adopt different pricing assumptions and hence give rise to different prices even though they may have exactly identical features. In addition, DW prices may be impacted by the demand and supply from the market, especially when the outstanding amount is high and the ability for the market maker to influence the price is limited.

  • 12. What is “Time-Decay”?

    Time-decay specifies the rate at which the Derivative Warrant (DW) price decreases over time, assuming other factors remain constant. More details on time decay can be found here (link to http://jpthai.dbpower.com.hk/en/knowledge/knowledge_basic.php)

  • 13. What is a Market Maker (MM)?

    Market Maker is the DW liquidity provider who will provide DW bid price and DW offer price on continuous basis during trading hours based on Market Maker obligation. Investors can ensure that there is enough liquidity to trade when Market Maker performs the duties on specific instrument. Please refer to Market Maker obligation here http://jpthai.dbpower.com.hk/en/knowledge/market_maker.php

  • 14. What is “Exercise Ratio”?

    Exercise ratio is no. of DW per one 1 unit of underlying for Single Stock DW. For Index DW, it is called “Multiplier” which is how many THB per 1 index point.

  • 15. What is “Outstanding Amount”? What are the implications for investors if a particular Derivative Warrant (DW) has high outstanding amount?

    Outstanding amount refers to the number of DWs that are held by investors at a particular time. A high outstanding amount generally means there is a high demand from investors in a particular DW. In addition, outstanding percentage refers to the number of a particular DW held by investors expressed as a percentage of the total number of that DW issued.

    As mentioned in #11, the greater the outstanding amount, the greater potential that DW price is affected by market force as the ability of the market maker to influence the price is limited.

  • 16. Why is the sensitivity (in terms of the change in price) of some derivative warrants (DW) greater than the others despite having the same underlying stock?

    The sensitivity of the price of DW to the movement of the underlying price depends on various factors, namely:

    • (1) In-The-Moneyness of the DW - The more in-the-money the DW is, the greater its sensitivity.

    • (2) Exercise Ratio – Expressed in term of the number of DWs per 1 underlying stock, the higher the exercise ratio, the greater its sensitivity.

    • (3) Time-to-Maturity – The relationship can generally be broken down into 2 cases:

      • a. In-the-Money DW – More time-to-maturity means lower sensitivity.

      • b. Out-of-the-Money DW – More time-to-maturity means higher sensitivity.

    Generally speaking, In-the-Money DW is more sensitive to the change of underlying and therefore allows the investors to make profits from during market sideway/trend reversal movements. Conversely, Out-of-the-Money DW is less sensitive to change of underlying price and is more appropriate for trading during strong trend market/trend following.

  • 17. Why does a Market Maker (MM) quote a wider spread for Derivative Warrants (DW) on a small-cap underlying comparing to a large-cap underlying?

    In providing the quote, the Market Maker needs to take into account of hedging costs, liquidity, spread and volatility of hedging instrument. Normally, large-cap stocks has better liquidity which allows MM to hedge its risks and thus to provide tight spread.

  • 18. Implied volatility (IV) is one of input parameters for pricing a Derivative Warrant (DW). How can investors observe the volatility in the market?

    Investors can observe historical volatility and average implied volatility from www.JPMorganDW41.com.

  • 19. How can investors contact JPMorgan DW41 for additional Q&A ?

    Investors can contact us through JPMorgan DW41 Hotline: 02-684-2600

  • 20. How is the cash settlement value of a derivative warrants determined?

    Cash settlement value is calculated after market close on DW last trading date.

    For Call DW,

    Cash Settlement Amount = (Underlying Closing Price – Exercise Price*) x (1/Exercise Ratio)**

    For Put DW,

    Cash Settlement Amount = (Exercise Price* - Underlying Closing Price) x (1/Exercise Ratio)**

    *3 decimals are applied for Exercise Price

    ** 5 decimals are applied for (1/Exercise ratio) and cash settlement amount

  • 21. What happens to the derivative warrant (DW) when the underlying company pays a cash dividend? What about when there is a stock-split?

    Issuers will adjust the DW exercise price and DW exercise ratio after market close before Ex-Date in order to make DW premium indifference between before Ex-Date and After Ex-Date. Assume same underlying price and no time decay. Please see the list and guideline of corporate adjustment here http://jpthai.dbpower.com.hk/en/knowledge/corporate_action.php

  • 22. Can investors trade Derivative Warrants (DW) during opening and closing auctions?

    Yes, however, there is the risk that market can open any times during auction which make underlying price and DW price very fluctuate. Based on existing Market Maker Obligation, market maker may not perform duties during auctions.

Investors should study and understand the products, return conditions, and risk factors before making an investment.