[DerivativeABC] What is an Equity Warrant Security 'ELW'?

[Asia Economy Reporter Park Jihwan] Equity-Linked Warrants (ELW) are financial products that grant the right to buy or sell stocks or receive cash based on the price or index of an underlying asset, such as a specific stock price or stock index, according to a pre-agreed method triggered by the unilateral declaration of intent by one party. In Korea, the underlying assets for ELWs are individual stock prices and the KOSPI 200 index.

Equity-Linked Warrants are fundamentally option products. Call warrants, which are the right to buy, generate profits when the price of the underlying asset rises, while put warrants, which are the right to sell, generate profits when the stock price falls. If you expect the price of the underlying asset to rise, you should purchase call warrants; if you predict it will fall, you should buy put warrants.

For example, if you buy an ELW for 5,000 won that allows you to purchase stock of Company A, currently priced at 20,000 won, at 60,000 won one year later, and after one year the stock price of Company A rises to 100,000 won, the ELW holder can exercise the right to buy the stock at 60,000 won and sell it at 100,000 won.

The biggest advantage of investing in Equity-Linked Warrants is leverage. Buying stocks directly requires a large amount of capital, but options have relatively low prices, so the investment burden is fundamentally lower.

Conversely, the major drawback is the high risk. While leverage can maximize profits, it also increases the risk of principal loss. If the underlying asset rises by 10%, the price of a call warrant can increase by 5 to 6 times or more. However, if the stock price falls, the possibility of exercising the option disappears, and its value can become zero.

This content was produced with the assistance of AI translation services.