Warrants

A warrant is an instrument that gives the holder a right – but not the obligation - to "buy" or "sell" an underlying asset at a pre-set price (called the "exercise price") on or before the expiry date. Warrants can be issued over a range of assets, including stocks, stock indices, currencies and commodities or a basket of assets. It does not give you any rights in or to the underlying asset.

There are two types of warrants:

(a) A "call" warrant may be invested in by an investor who believes that the price of the underlying asset will increase during the term of the warrant.

(b) A "put" warrant may be invested in by an investor who believes that the price of the underlying asset will decrease during the term of the warrant.

Typically, warrants in Hong Kong are issued with a life span of six months to two years, but are usually traded by investors before they expire. Warrants magnify your investment through leverage. This carries significant opportunities as well as significant risks. Warrants usually cost a fraction of the price of the underlying asset and may provide a leveraged return, but such leverage could also magnify your losses.

Characteristics of Warrants

You can trade Warrants on the Exchange during trading hours, similar to trading stocks.

The higher the leverage, the greater the potential reward and risk.

More underlying assets are eligible for warrant issuance as compared to CBBCs.

Product Information Statement

A warrant is an instrument that gives the holder a right – but not the obligation - to "buy" or "sell" an underlying asset at a pre-set price (called the "exercise price") on or before the expiry date. Warrants can be issued over a range of assets, including stocks, stock indices, currencies and commodities or a basket of assets. It does not give you any rights in or to the underlying asset.

There are two types of warrants:

(a) A "call" warrant may be invested in by an investor who believes that the price of the underlying asset will increase during the term of the warrant.

(b) A "put" warrant may be invested in by an investor who believes that the price of the underlying asset will decrease during the term of the warrant.

Typically, warrants in Hong Kong are issued with a life span of six months to two years, but are usually traded by investors before expiry. Warrants magnify your investment through leverage. This carries significant opportunities as well as significant risks. Warrants usually cost a fraction of the price of the underlying asset and may provide a leveraged return, but such leverage could also magnify your losses.

Underlying Asset

Warrants can be issued over a range of assets, including stocks, stock indices, currencies and commodities or a basket of assets.

Warrant Price

It consists of two components = intrinsic value + time value.

Intrinsic Value

For a call warrant: Intrinsic value exists if the spot price of the underlying asset is higher than the exercise price of the warrant.

For a put warrant: Intrinsic value exists if the exercise price of the warrant is higher than the spot price of the underlying asset.

 Call WarrantIntrinsic Value
Underlying Asset Price > Exercise PriceIn-the-money> 0
Underlying Asset Price < Exercise PriceOut-of-the-money0
Underlying Asset Price = Exercise PriceAt-the-money0
 Put WarrantIntrinsic Value
Underlying Asset Price > Exercise PriceOut-the-money0
Underlying Asset Price < Exercise PriceIn-of-the-money> 0
Underlying Asset Price = Exercise PriceAt-the-money0
Time Value

It is the difference between the warrant price and its intrinsic value. Time value exists as long as the warrant is not expired and is impacted by implied volatility, interest rates and the maturity date .Assuming the price of the underlying asset and all other factors remain constant, the time value of warrant will decline with passage of time. The closer it is to maturity, the faster the time value of the warrant drops. The daily time value decay of a warrant with longer tenor will tend to decrease slower than that of a warrant with short tenor.

Exercise Price

A warrant holder can trade warrant in the market before maturity. If the warrant is in-the-money at maturity, it will be exercised automatically, and investors will receive cash at settlement.

Implied Volatility

The implied volatility is the expected volatility of the warrant over a specific period of time. The change in implied volatility will be affected by market demand and supply, over-the-counter options, underlying's historical volatility and change in listed options.

Issuers have varied operation models and risk management frameworks, hence warrants issued by different issuers may have a different implied volatility despite having similar terms and conditions.

Contract Multiplier

Warrant price x board lot unit

Last Trading Day

The last day when a warrant can be traded on an exchange

Expiry Day

The date on which a warrant will expire

Final Settlement Price

For warrants issued on a single local (HK) stock traded on the Exchange, the settlement price at expiry is calculated based on the 5-day average closing price of the underlying stock prior to and excluding the expiry day.

For local index (HK) warrants, the settlement price at expiry is based on the final settlement price of the corresponding index futures contract of the same expiry month as the warrants traded on the Hong Kong Futures Exchange.

Call warrant cash settlement amount = settlement price of underlying asset - exercise price of the warrant / conversion ratio

Put warrant cash settlement amount = exercise price of the warrant - settlement price of underlying asset / conversion ratio

Settlement method

A warrant can be settled by cash or physical delivery upon exercise.

It is available for Professional Investor or Non- Professional Investor.

Non-collateralisation

Warrants are not secured by any asset of the issuer or the guarantor (if any) or supported by any other collateral.

Credit Risk

Holders of warrants are unsecured creditors of the issuer and the guarantor (if any) and they have no preferential claim to any assets that an issuer or a guarantor (if any) may hold. You can access information about issuers' credit ratings on the HKEX's website.

Gearing Risk

Although warrants often cost less than the underlying assets, a warrant may change in value to a much greater extent than the underlying assets. Although the potential return on warrants may be higher than that on the underlying assets, in the worst case the value of warrants may fall to zero and holders may lose their entire investment amount.

Limited Life

Unlike stocks, warrants have an expiry date and therefore a limited life. Unless the warrants are in-the-money, they become worthless when they expire.

Time Decay

So long as other factors remain unchanged, the time value of warrants or funding costs of CBBCs will decrease over time and will become zero upon maturity. Therefore, without a strong view of the underlying assets, warrants should be viewed as a relatively short term investment product in comparison with an investment in the underlying assets.

Market Forces

In addition to the basic factors that determine the theoretical price of a warrant, prices of warrants are also affected by the demand for and supply of the warrants. This is particularly the case when warrants of a series are almost sold out and when there are further issues of a series of warrant.

Turnover

High turnover should not be regarded as an indication that the price of a warrant will go up. The price of a warrant is affected by a number of factors in addition to market forces, such as the price of the underlying assets and their volatility, the time remaining to expiry, interest rates and the expected dividend on the underlying assets.

Possibly Limited Secondary Market

The liquidity provider may be the only market participant for a particular warrant. The more limited the secondary market, the more difficult it may be for you to realise the value in the warrant before expiry.

Operational and Technical Problems Affecting Liquidity Services

The liquidity provider may not be able to provide liquidity when there are operational and technical problems hindering its ability to do so. Even if the liquidity provider is able to provide liquidity in such circumstances, its performance on liquidity provision may be adversely affected.

Corporate Action of the Underlying Stocks

Corporate actions affect the value of the underlying stocks which in turn affect the value of the warrants. Adjustments may or may not be made to the terms of the warrants (such as entitlement ratio, exercise price, etc.) depending on the terms and conditions set out in the listing documents. Where adjustments are to be made, the adjustments will only become effective (the "Effective Date") when all necessary parameters can be determined.

Additional Risks in Trading Warrants with Overseas Underlying Assets
Exchange Rate Risk

Investors trading in warrants with overseas underlying assets may be exposed to an exchange rate risk during the term of the warrants when the price and cash settlement amount of such warrants are converted from a foreign currency in which the overseas underlying asset is priced into Hong Kong dollars.

Different Trading Hours

Trading in the overseas underlying assets on the underlying exchange may be suspended during non-trading hours of the Exchange.

If trading in the overseas underlying assets on the underlying exchange is suspended, trading in the warrants on the Exchange will not be automatically suspended – in such case, the market price of the warrants may fluctuate significantly until trading in the warrants on the Exchange is suspended. If trading in the overseas underlying assets on the underlying exchange resumes following a suspension, trading in the warrants on the Exchange will not be resumed automatically and you will not be able to trade the warrants until trading in the warrants on the Exchange is resumed.

In addition, the trading price of the overseas underlying assets is calculated and published during the trading hours of the underlying exchange.

Less Public Information about the Overseas Underlying Assets and Such Information May Not Be Available in English or Chinese

There may be less publicly available information about the overseas underlying assets than those about Hong Kong underlying assets and some of that information may not be available in English or Chinese. If you do not understand any such information, you should obtain independent advice.

Political and Economic Risk

The trading prices of the overseas underlying assets may be subject to political, economic, financial and social factors that apply in those geographical regions, which may differ favourably or unfavourably from those factors that apply to Hong Kong. Moreover, foreign economies may also differ favourably or unfavourably from the Hong Kong economy in important respects such as growth of gross national product, rate of inflation, capital reinvestment, resources and self-sufficiency.

The value of warrant may fall to zero and holders may lose their entire investment amount.

The higher the leverage, the greater the potential reward and risk. Subject to the factors affect the price.

This product is not principal protected.

Standard (i.e. non-exotic) warrants do not have a mandatory call feature.

Warrants are traded on the Exchange during trading hours. Investors may contact their brokers for placing orders.

The product is a complex product and investors should exercise caution in relation to the product.

In the worst case scenario (e.g. insolvency of issuer), the investor may get nothing back and the potential maximum loss could be 100% of investment amount.

If the offering documents provided by the issuer have not been reviewed by the SFC; investors are advised to exercise caution in relation to the offer.

SFC authorization does not imply official recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance.

The product is available for professional investors / non- professional investors.

The above information is provided for reference only. The information may not contain all material terms, in and of itself should not form the basis for any investment decision. Potential investors must seek their own independent advice in relation to any legal, tax, accounting or regulatory issues relating to the matters discussed herein, By accepting receipt of this information the reader will be deemed to represent that they posses, either individually or through their advisor, sufficient investment expertise to understand the risks involved in any purchase or sale of any investment products, referenced herein, and investor has made its own independent judgment. The value, price or income from investments may fall as well as rise.