J.P. Morgan Thailand DW41

Basic DW Knowledge

Derivative Warrants (DW)

- a form of option in which investor can only take a long position
- Typically issued with a life span of 2 months to 2 years but investors usually trade before expiry
- More than 1,300 warrants traded in The Stock Exchange of Thailand with variety of features and underlying.

(1) What is DW ?

(2) The component of DW Price

(3) Comparison between Call DW and Put DW

(4) Key consideration of investing DW

(5) Which type of investor are you

(6) Comparing DW with other products

(1) What is DW ?

A Call DW – for investors hold positive views on the underlying asset
A Put DW – for investors hold negative views on the underlying asset

DW ticker – i.e. CPAL41C1912A , AOT41P1912A

(2)The Components of DW Price

Price = Intrinsic Value + Time Value

(2.1) Factors affecting warrants Prices – Intrinsic Value

- Level of underlying price versus the exercise price
- Moneyness: In-The-Money (ITM), At-The-Money (ATM), Out-Of-Money (OTM)

(2.2) Factors affecting Warrants Prices – Time Value

Time value reflects the probability of a warrant expiring in-the-money to realize its intrinsic value. The longer the time to maturity, the greater the chance that a warrant will become in- the-money, or profitable.

Increase in Call DW Put DW
Time to maturity Increase Increase

(2.3) Factors affecting warrants Prices – Implied Volatility

ค่าความผันผวนแฝง – the marketplace’s view for future volatility of a stock. If marketplace views themovement of stock will be more volatile (higher implied volatility), the higher probability that a warrant will become in-the-money, which increases the time value and hence the warrant price.

Increase in Call DW Put DW
ค่าความผันผวนแฝง Increase Increase

(2.4) Factors affecting warrants Prices – Dividends

Based on DW Term & Condition, Issuers will adjust DW exercise price and exercise ratio in order to cover the impact on underlying dilution effect. Assume other factors constant, DW price should be the same between before XD and after XD.

(2.5) Factors affecting warrants Prices – Interest Rate

Increase in interest rate implies higher funding cost, therefore, Call DW will be better investment opportunity than directly invest in underlying. However, higher interest rate implies higher reinvestment return, therefore, Put DW will be worst investment than sell the underlying and reinvest with high reinvestment return.

Increase in Call DW Put DW
Change in Interest Rate Increase Decrease

(3) Comparison between Call DW and Put DW

Increase in Call DW Put DW
หลักทรัพย์อ้างอิง Price Increase Decrease
Expected Dividends - -
Interest Rate Increase Decrease
Time To Maturity Increase Decrease
ค่าความผันผวนแฝง Increase Decrease

(4) Key considerations of investing DWW

Managing investment time horizon

- Change in implied volatility
- Time value decrease over time
- If holding period is long (i.e. to expiry date), underlying price must be higher (call) or lower (put) than exercise price

Select DW structure base on “Exercise Price and Expiry date”

(5) Which type of investor are you?

Active Day Trader –– ease of trading and concern transaction cost
- Tight bid-ask spread
- No margin requirement
- Can be traded by stock account

Trend Investor –– Market trend and money flow
- DW money flow could be a good market trend indicator

Buy and Holder –– Portfolio diversification, Risk Management
- Wide range of available underlying including single stock and index
- DW provide gearing effect comparing with holding stock
- Can be traded by stock accountLimit investment loss

(6) Comparing DW with other products

DW Options Futures Equities
Holding Period Short Long Short Long/Short
Provides Leverage Yes Yes Yes No
Shortable No Yes Yes Depends
Limited Downside Yes If Long No No
Bid-Ask Spread In general tight No No In general tight
Expiration Can be tailored Fixed Fixed No
Account Type Equities A/C TFEX A/C TFEX A/C Equities A/C
Margin Requirement No Yes Yes No
Volatility Risk Yes Yes No No

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