HSBC2527_booklet_e08 4/8/08 1:43 AM 1

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HSBC Warrant HotIine 2822 1849
TabIe of Contents
The Source of Wisdom
One vhal is a varranl? ..............................................................................................2
Two nveslnenl Va|ue of varranls ...............................................................................3
Three ore Aboul varranl Ternino|ogies ...........................................................................4
Four Conparison Anong nlheonev, Allheonev and Ouloflheonev varranls ...5
Five Sinp|e alhenalics on varranl Price ...................................................................57
The Strategies
One Shorl Tern Specu|alion:
Have a C|ear Direclion on lhe ovenenl of lhe Under|ving Assel ............................9
Two Prine Tine lo nvesl in varranls ..................................................................!0
Three Consideralion on Oulslanding Ouanlilv ..................................................................!0
Four Consideralion on Exercise Price ................................................................................!!
Five Consideralion on Tern .............................................................................................!2
Six Consideralion on np|ied Vo|ali|ilv .........................................................................!3
Seven Faclors Affecling varranl Price .......................................................................!4
Eighl nporlance of Selling SlopLoss/SlopCain Leve| ..............................................!5
ine How lo Ca|cu|ale Cains and Losses? ..................................................................!6!7
A CIearer Vision
One .............................................................................................................................!9
Two .............................................................................................................................20
Three .............................................................................................................................2!
Four .............................................................................................................................22
Five .............................................................................................................................23
Six .............................................................................................................................23
Seven .............................................................................................................................24
Eighl .............................................................................................................................24
ine .............................................................................................................................25
Introduction to HSBC Warrant Website ...................................................................2629
Prepared bv vea|lh anagenenl Sa|es, HSBC C|oba| arkels
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The Basics - One
What is a Warrant7
As a derivalive loo|, warranls have becone nore and nore popu|ar anong Hong Kong inveslors.
Sone peop|e are fond of lheir gearing fealure, be|ieving lhal lhrough an accurale forecasl
aboul lhe novenenl of an under|ving assel, a sna||er anounl of capila| cou|d vie|d higher
polenlia| relurns. However, an inaccurale forecasl wou|d resu|l in grealer |osses.
Fron lhe perspeclive of lrading nelhod, il is indeed lrue lhal lhere are no significanl differences
belween warranls and slocks. Bolh can be lraded free|v on lhe slock exchange. n essence,
warranls are indeed a lvpe of oplion offering lhe ho|der a righl lo buv or se|| a specified
under|ving assel, such as slocks, indices, currencies or connodilies al a predelernined
exercise price. vhen lo exercise lhis righl depends on whelher lhe warranl is an Anerican
slv|e warranl (lhe righl can be exercised al anv line or an Europeanslv|e warranl (lhe righl
can on|v be exercised on nalurilv. Slocks do nol possess lhese unique characlerislics. This
is exacl|v whv lhe risks and lrading slralegies of warranls and lhal of slocks cannol be discussed
on lhe sane ground.
2
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The Basics - Two
Investment VaIue of Warrants
A|lhough lhe prices of warranls are vo|ali|e, one shou|d nol lhink lhal lhev are on|v suilab|e
for inveslors wilh a ganb|ing allilude. n facl, warranls do possess inveslnenl va|ue lo a
cerlain degree. Their funclions are nol on|v |iniled lo shorllern specu|alion. vilh proper
use, lhev can even increase lhe f|exibi|ilv of lhe enlire inveslnenl porlfo|io and enhance relurns!
1. SeIIing Stocks to Lock In Profits
vhen an inveslor has gained reasonab|e profils fron a parlicu|ar |onghe|d slock, he/she
can cash in bv se||ing lhe slocks, and use a cerlain percenlage of lhe cash lo purchase a
warranl on lhal slock. nveslnenl relurns sini|ar lo lhe relurns of lhe slocks cou|d be
achieved bv lhe gearing effecl of lhe warranls. Bv doing so, on one hand lhe inveslor can
|ock in exisling profils, on lhe olher hand, he/she can use a sna||er anounl of funds lo
conlinue his/her inveslnenl in such slock wilhoul worrving lhe prob|en of se||ing lhe slocks
al a |ow price. n addilion, he/she can even a||ocale lhe fund lo olher inveslnenl loo|s so
as lo furlher enhance lhe va|ue of his/her assels.
However, due lo lhe gearing effecl of warranls, lhev can on|v p|av a sna|| parl in lhe enlire
inveslnenl porlfo|io. n order lo avoid lhe porlfo|io perfornance fron being loo vo|ali|e, il
is advisab|e lhal lhe proporlion of warranls shou|d nol be loo high.
2. Hedging HoIding Risks
Sonelines, an inveslor nav wanl lo ho|d cerlain slocks for a |onger period of line bul
worrv lhal lhe perfornance of lhe enlire inveslnenl porlfo|io wou|d be affecled if lhe narkel
goes downward in lhe shorl lern. n lhis silualion, he/she can use a sna|| anounl of funds
lo purchase a cerlain nunber of pul warranls associaled lo lhe porlfo|ios assels. To hedge
lhe risks of ho|ding is sini|ar lo lhe concepl of 'buving insurance'. f such slock prices fa||
as expecled, lhe inveslors profils nade fron pul warranls can conpensale parl of lhe
|osses due lo lhe weak perfornance of lhe porlfo|io in lhe shorl lern.
3
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The Basics - Three
More about Warrant TerminoIogies
Differenl fron slocks, warranls do nol possess infornalion such as PriceEarnings (PE Falio,
dividend vie|d, and so on. However, lhere are sone dislinclive lerns lhal inveslors nusl be
aware of:
4
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Ca|| varranls Offer lhe ho|der a righl (bul nol an ob|igalion lo buv a cerlain anounl (depending
on lhe Conversion Falio of lhe under|ving assel on a predelernined nalurilv dale
al a specified Exercise Price. Thev can be regarded as a |everaged inveslnenl loo|
whi|e anlicipaling narkel uplurns in lhe shorl lern.
Pul varranls Offer lhe ho|der a righl (bul nol an ob|igalion lo se|| a cerlain anounl (depending
on lhe Conversion Falio of lhe under|ving assel on a predelernined nalurilv dale
al a specified Exercise Price. Thev can be regarded as a |everaged inveslnenl loo|
whi|e anlicipaling narkel downlurns in lhe shorl lern.
nlrinsic Va|ue The difference belween lhe Exercise Price and lhe spol price of lhe under|ving assel.
Zero is lhe |owesl nlrinsic Va|ue of a warranl. The figure cannol be negalive, because
olherwise il is nore sensib|e lo purchase lhe under|ving assel direcl|v fron lhe
narkel.
Tine Va|ue The gap belween lhe spol price and nlrinsic Va|ue of a warranl. Such va|ue is lhe
price paid bv a warranl buver in exchange for lhe ho|ding lhe warranl and naking
use of ils gearing effecl.
Exercise Price The predelernined price for an inveslor lo buv or se|| lhe under|ving assel of a
warranl. On lhe nalurilv dale of lhe warranl, such Exercise Price wi|| be used lo
ca|cu|ale lhe anounl for cash sell|enenl.
nlheonev The spol price of lhe under|ving assel of a Ca|| varranl being higher lhan lhe Exercise
Price, or lhe spol price of lhe under|ving assel of a Pul varranl being |ower lhan
lhe Exercise Price. l neans lhe warranl possesses an nlrinsic Va|ue and wi|| be
exercised.
Allheonev vhen lhe price of lhe under|ving assel is equiva|enl lo lhe Exercise Price.
Ouloflheonev l neans lhal a warranl does nol possess an nlrinsic Va|ue, being lhe spol price of
lhe under|ving assel of a Ca|| varranl |ower lhan lhe Exercise Price, or lhe spol price
of lhe under|ving assel of a Pul varranl higher lhan lhe Exercise Price. f an inveslor
sli|| ho|ds an Ouloflheonev warranl on lhe nalurilv dale, such warranl wi||
becone worlh|ess bv lhen and he/she wi|| |ose a|| lhe inveslnenls.
De|la l shows lhe lheorelica| novenenl in warranl price when lhe price of lhe under|ving
assel changes. De|la of a Ca|| varranl |ies belween 0 and !, and for Pul varranl
De|la |ies belween 0 and !.
Conversion Falio To specifv lhe anounl of lhe under|ving shares lhe ho|der of each warranl is enlil|ed
lo buv or se||.
Effeclive Cearing Fefers lo lhe lheorelica| percenlage novenenl in warranl price for !' novenenl
of lhe under|ving assel.
The fornu|a is: Effeclive Cearing = Cearing x De|la.
Preniun l indicales whal percenlage lhe under|ving assel has lo rise (for Ca|| varranl/fa||
(for Pul varranl for a warranl inveslor lo becone breakeven if he/she purchases
lhe warranl al spol and ho|ds il unli| nalurilv.
Hislorica| Vo|ali|ilv l is principa||v used as a reference lo assess lhe previous price f|uclualion of lhe
under|ving assel.
np|ied Vo|ali|ilv l is one of lhe nosl inporlanl indicalors when assessing a warranl. l refers lo lhe
eslinale of fulure price vo|ali|ilv of a specified under|ving assel, and is genera||v used
bv lhe narkel as an indicalor lo decide whelher a warranl is va|uefornonev or nol.
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The Basics - Four
Comparison Among In-the-Money, At-the-Money and Out-of-the-Money Warrants
5
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nlheonev Exercise Price < Exercise Price > > 0
Under|ving Assel Price Under|ving Assel Price
Allheonev Exercise Price = Exercise Price = = 0
Under|ving Assel Price Under|ving Assel Price
Ouloflheonev Exercise Price > Exercise Price < = 0
Under|ving Assel Price Under|ving Assel Price
The Basics - Five
SimpIe Mathematics on Warrant Price
To succeed in warranl inveslnenl, an inveslor nusl undersland how lhe price of a warranl
changes. Basica||v, lhe price of a warranl is nade up of nlrinsic Va|ue and Tine Va|ue.
nlrinsic Va|ue on|v app|ies lo nlheonev warranl, and il wi|| be adjusled when lhe price of
lhe under|ving assel changes. The higher (ca|| warranl/|ower (pul warranl lhe price of lhe
under|ving assel as conpared lo lhe Exercise Price, lhe higher lhe nlrinsic Va|ue.
Tine Va|ue is lhe va|ue on how far a warranl is awav fron lhe nalurilv dale. This va|ue wi||
on|v drop and does nol have lhe chance lo rise al a||. Al lhe inilia| phase of lhe inveslnenl,
Tine Va|ue wou|d have |ess inpacl on a warranl. However, as lhe warranl is gelling c|oser
lo nalurilv, line decav wi|| acce|erale. Evenlua||v, lhe warranls Tine Va|ue wi|| drop lo zero.
Bv lhen, if lhe warranl is nol nlheonev, il wi|| becone worlh|ess and lhe inveslor wi|| |ose
a|| his/her inveslnenls.
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6
ExampIe: Angang SteeI I347I CaII Warrant I3209I
Exercise Price: HKD!6.63
Conversion Falio: !0:!
alurilv Dale: !7Ocl2003
np|ied Vo|ali|ilv: 79.!9' (reference dale 05ar2003
Assuning lhe share price of Angang Slee| is HKD2!.00, lhe price of
(3209 is HKD0.660, lhen:
nlrinsic Va|ue = (HKD2!.00HKD!6.63/!0
= HKD0.432
Tine Va|ue = varranl Va|uenlrinsic Va|ue
= HKD0.660HKD0.432
= HKD0.223
Assuning lhe share price of Angang Slee| is HKD!3.62, lhe price of
(3209 is HKD0.460, lhen:
nlrinsic Va|ue = (HKD!3.62HKD!6.63/!0
= HKD0.!94
Tine Va|ue = varranl Va|uenlrinsic Va|ue
= HKD0.460HKD0.!94
= HKD0.266
Assuning lhe share price of Angang Slee| is HKD!5.00, lhe price of
(3209 is HKD0.3!3, lhen:
nlrinsic Va|ue = (HKD!5.00HKD!6.63/!0
= HKD0.!63.
Since nlrinsic Va|ue cannol be negalive, il is considered 0.000.
Tine Va|ue = varranl Va|uenlrinsic Va|ue
= HKD0.3!3HKD0.000
= HKD0.3!3
'The exanp|e is for i||uslralive purposes on|v and is nol indicalive of fulure relurns.
The Basics - Five
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7
l is oflen said lhal 'Tine is onev', Tine Va|ue wi|| gradua||v dininish as nalurilv is approaching.
This can be regarded as lhe price a warranl inveslor has lo pav in exchange for lhe gearing
effecl. Since line decav is unavoidab|e, an inveslor can on|v p|ace hopes on an accurale
forecasl aboul lhe price novenenl of lhe under|ving assel, 'belling' an increase in warranl
price lhrough lhe increase in nlrinsic Va|ue. l is described as 'belling' because lhe nlrinsic
Va|ue has lo cover line decav firsl, before an increase in warranl price is possib|e (see diagrans be|ow.
Intrinsic
VaIue
Time
VaIue
Warrant
Price7
Intrinsic
VaIue
Time
VaIue
Warrant
Price FaIIs
Intrinsic
VaIue
Time
VaIue
Warrant
Price FaIIs
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The Strategies - One
Short Term SpecuIation: Have a CIear Direction on the Movement of the
UnderIying Asset
As nenlioned previous|v, line decav is unfavorab|e lo lhe warranl prices. There are advanlages
if an inveslor p|ans for a shorllern specu|alion in order lo |essen lhe affecl of Tine Va|ue on
warranl prices and relurns. However, lhe precondilion is lhal lhe inveslor shou|d have a c|ear
direclion when forecasling lhe novenenl of lhe under|ving assel.
There are nanv wavs lo forecasl lhe novenenl of lhe narkel in lhe fulure, such as a
breaklhrough in lhe lechnica|s of lhe under|ving assel, a surprise on conpanv resu|ls, a |aunch
of acquisilion or reslrucluring p|an in lhe shorl lern, and so on. Even narkel novenenl has
been accurale|v forecasled, nonelhe|ess, inveslors need lo lake inlo accounl lhe range of
change and rale of lhe change in slock prices is il a dranalic change in lhe shorl lern, or a
sleadv lrend of uplurns/downlurns? nveslors have lo fighl againsl line decav and nininize
lhe inpacl of np|ied Vo|ali|ilv (lhe |onger lhe warranl is being he|d, lhe grealer lhe chance
np|ied Vo|ali|ilv wi|| change. Based on hislorica| figures, Chinese financia| slocks and cvc|ica|
slocks (such as raw naleria| slocks are nore |ike|v lo f|ucluale in lhe shorl lern.
f lhe under|ving assel is expecled lo have a significanl increase/decrease in lhe shorl lern,
inveslors can be nore aggressive. Thev can consider lo purchase ca||/pul warranls wilh a
shorllonediun lern (2 lo 4 nonlhs lhal are c|oselolhenonev or s|ighl|v Ouloflheonev,
so as lo achieve a beller effeclive gearing and lherebv increase polenlia| relurns. Cerlain|v,
inveslors nusl carefu||v conlro| lheir inveslnenl anounl. Thev shou|d nol pul a|| nonev inlo
such warranl wilh a 'reck|ess ganb|ing' allilude.
9
HSBC2527_booklet_e08 4/8/08 1:43 AM 12
The Strategies - Two
Prime Time to Invest in Warrants
varranl inveslnenl is nol an a||wealher business. Being ab|e lo seize lhe righl lining is lhe
on|v wav lo increase lhe chance of naking profils. Cenera||v speaking, lhe fo||owing lhree
scenarios can be considered as prine line lo invesl in warranls:
1
IQS\O`W]
!. The narkel is no |onger
swinging belween uplurns and
downlurns and is showing a
c|ear direclion.
2. np|ied Vo|ali|ilv slops fa||ing
and begins lo bounce back.
3. Oulslanding quanlilv renains
al a |ow |eve|.
The Strategies - Three
Consideration on Outstanding Ouantity
Two kev neasurenenls are being used bv lhe narkel lo ana|vze oulslanding warranl quanlilv
(lhal is, lhe nunber of warranls he|d bv inveslors. The firsl one is oulslanding quanlilv, which
refers lo lhe aclua| quanlilv of a parlicu|ar warranl he|d bv inveslors (for exanp|e, 200 ni||ion.
The second one is oulslanding quanlilv percenlage, which is lhe percenlage on lhe nunber
of warranls he|d bv inveslors re|alive lo lhe lola| issue size of such warranl. A|lhough lhere
is nol an eslab|ished ru|e as lo whal |eve| an oulslanding quanlilv percenlage is considered
high, inveslors shou|d beller avoid buving warranls wilh a high oulslanding quanlilv (for inslance,
up lo hundred ni||ions, or warranls which have nol been we||nainlained bv lhe issuer in an
aclive nanner. This is because lhe price lrend of a warranl lends lo |ean lowards being narkel
driven, even lhough inveslors have accurale|v forecasled lhe direclion of lhe under|ving assel,
lhe warranl price nav nol fo||ow lhe novenenl of lhe under|ving assel, resu|ling in grealer
risks lo be borne bv lhe inveslors.
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An ease lo lhe fa|| of lhe overa|| np|ied Vo|ali|ilv can be expecled.
The rise of np|ied Vo|ali|ilv is favourab|e lo warranl prices.
To avoid lhe warranl price fron being affecled bv lhe accunu|alion
of 'expensive warranls' boughl previous|v. This is a silualion wherebv
lhe warranl price drops despile an accurale forecasl in direcliona|
novenenl of lhe under|ving assel (assuning a|| olher faclors which
nav affecl lhe warranl price renain unchanged.
HSBC2527_booklet_e08 4/8/08 1:43 AM 13
The cIosing price of China COSCO HoIdings on 03-Mar-2008 was
HKD23.00.
HSCCHC@EC0309A (7043
Exercise Price : HKD!3.53
Effeclive Cearing : 2.03x
Conversion Falio : !0:!
varranl Price : HKD0.360
The Strategies - Four
Consideration on Exercise Price
Exercise Price is lhe benchnark used lo define lhe fina| sell|enenl anounl of a warranl.
However, lhis does nol nean lhal an inveslor who does nol inlend lo ho|d lhe warranl unli|
nalurilv does nol need lo consider lhe Exercise Price |eve|. This is because nlheonev,
Allheonev and Ouloflheonev warranls wou|d have a direcl inpacl on inveslnenl relurns
and ho|ding risks.
Lel us use lwo China COSCO Ho|dings ca|| warranls lo i||uslrale lhis':
HSCCHC@EC0303 (3735
Exercise Price : HKD26.23
Effeclive Cearing : 3.0!x
Conversion Falio : !0:!
varranl Price : HKD0.420
The above shows lhal (7043 is an nlheonev ca|| warranl and has a higher face va|ue.
vilh an effeclive gearing of on|v 2.03x, ils risks are re|alive|v |ow. l wou|d be suilab|e
for nore conservalive inveslors. On lhe conlrarv, lhe Ouloflheonev warranl (3735
has a higher effeclive gearing. l wi|| becone nore powerfu| in a vo|ali|e narkel bul ils
risks are re|alive|v higher. l wou|d suil nore aggressive inveslors for shorllern geared
lrading purposes.
'The exanp|e is for i||uslralive purposes on|v and is nol indicalive of fulure relurns.
11
HSBC2527_booklet_e08 4/8/08 1:43 AM 14
The Strategies - Five
Consideration on Term
n genera|, fron issuance li|| nalurilv, a warranl has a period ranging fron six lo nine nonlhs
for inveslors lo buv and se||. How cou|d inveslors choose a warranl wilh a suilab|e lern?
This depends on vour inveslnenl approach and expeclalion on lhe narkel silualion.
12
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fa|| in lhe shorl lern
Sleadv rise/fa||
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nonlhs
ediun lern (3 lo 6
nonlhs/|ong lern
above 6 nonlhs
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High
ediun/Low
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The warranl is nore
sensilive lo lhe price of lhe
under|ving assel. For lhose
s|ighl|v Ouloflheonev
and Allheonev warranl,
lhe inpacl is nuch grealer.
However, polenlia| relurns
and risks are bolh verv high.
npacl of line decav is
re|alive|v |iniled. Despile
lhe lrend of under|ving assel
is going in opposile direclion
in lhe shorl lern, lhe drop
in lhe warranl price wou|d
be re|alive|v sna||.
o naller warranl of which lern has been chosen, inveslors have lo conpele wilh line.
Thev have lo slrive lo lhe increase nlrinsic Va|ue and fighl againsl line decav lhrough a !00
neler race (shorllern warranl or a naralhon (nediun lo |onglern warranl.
HSBC2527_booklet_e08 4/8/08 1:43 AM 15
The Strategies - Six
Consideration on ImpIied VoIatiIity
np|ied Vo|ali|ilv is lo ref|ecl lhe narkels expeclalion on lhe fulure vo|ali|ilv of lhe under|ving
assel. ssuers wou|d genera||v nake references lo np|ied Vo|ali|ilv |eve|s of OverlheCounler
(OTC oplions and nake appropriale adjuslnenls lo lhe np|ied Vo|ali|ilv |eve|s of lhe warranls.
Such |eve|s wi|| lhen be ref|ecled on warranl prices. The higher lhe vo|ali|ilv, lhe grealer lhe
chance a warranl lo becone nlheonev, and lhus lhe warranl price wou|d rise according|v,
and vice versa. Before naking decisions, inveslors nav use np|ied Vo|ali|ilv lo assess lhe
va|ue of warranls wilh sini|ar lerns (for inslance, alurilv Dale, Exercise Price, and pav
allenlion lo lhe slabi|ilv of lhe warranls np|ied Vo|ali|ilv.
To inveslors, np|ied Vo|ali|ilv cou|d be a friend or a foe. The change in vo|ali|ilv wou|d definile|v
affecl lhe warranl price. However, as il is difficu|l lo have a good grasp of np|ied Vo|ali|ilv,
inveslors cou|d on|v gel a beller underslanding of lhe vo|ali|ilv lrend of lhe under|ving assel
lhrough issuers reporling. vhen lhe vo|ali|ilv is going down, inveslors shou|d beller "refrain"
fron buving Ca|| varranls or Pul varranls.
ReIationship Between Change in ImpIied VoIatiIity and Warrant Price
Assuning il is a |onglern warranl, line decav has |ill|e inpacl on warranl price.
13
ImpIied
VoIatiIity
Movement of
UnderIying Asset
as expected
Warrant
Price
ImpIied
VoIatiIity
Movement of
UnderIying Asset
as expected
Warrant
Price
ImpIied
VoIatiIity
Movement of
UnderIying Asset
as expected
Warrant
Price
HSBC2527_booklet_e08 4/8/08 1:43 AM 16
The Strategies - Seven
Factors Affecting Warrant Price
14
Under|ving Assel Price: The nlrinsic Va|ue of a ca|| warranl rises when lhe price of lhe under|ving assel
rises. Such is a favourab|e faclor. On lhe conlrarv, lhe price of a pul warranl
fa||s when lhe nlrinsic Va|ue drops.
Expecled Dividend: nveslors ho|ding warranls wou|d nol receive dividends of lhe under|ving shares.
However, expecled dividend gains wou|d have been inc|uded bv lhe issuer lo
ca|cu|ale lhe warranl price al lhe line of issuance. n olher words, when lhe
under|ving shares dividend pavoul is a|ongside lhe issuers expeclalion, lhe
warranl price wou|d nol drop dranalica||v.
np|ied Vo|ali|ilv: The rise of np|ied Vo|ali|ilv neans lhal lhe under|ving assel has |arge f|uclualions.
A warranl has a higher chance of beconing nlheonev and even deep n
lheonev fron Ouloflheonev. Prices of ca|| warranls and pul warranls
wou|d bolh rise.
nleresl Fale: Each line an issuer issues a ca|| warranl, il has lo use funds lo purchase lhe
under|ving shares for hedging purposes. Therefore, when lhe borrowing cosl
(inleresl rale rises, lhe price of ca|| warranl wi|| rise according|v. On lhe conlrarv,
when lhe inleresl rale rises, lhe price of pul warranl wi|| go down.
Tern: The |onger lhe lern of a warranl, lhe |arger ils Tine Va|ue.
?OQb]` <VO\US ]T ?OQb]` B[^OQb ]\ <OZZ MO``O\b G`WQS B[^OQb ]\ Gcb MO``O\b G`WQS
Under|ving Assel Price
Expecled Dividend
np|ied Vo|ali|ilv
nleresl Fale
Tern
HSBC2527_booklet_e08 4/8/08 1:43 AM 17
The Strategies - Eight
Importance of Setting Stop-Loss]Stop-Gain LeveI
Due lo ils |everage, warranls usua||v have a wider range of price f|uclualion as conpared lo
slocks. l is, lherefore, nore inporlanl for inveslors lo nanage risks proper|v, lo |essen
polenlia| |oss or relain profils bv defining selling slop|oss/slopgain |eve|s.
n praclice, lhere are lwo aspecls lo consider:
1. Time
Tine is lhe enenv of inveslors. As nalurilv is approaching, lhe Tine Va|ue conlained in
lhe warranl price wi|| gradua||v dininish. Therefore, aparl fron expecling for a price change
in lhe under|ving assel, before purchasing warranls inveslors shou|d sel an inveslnenl
period, for inslance lhree lrading davs, so as lo nininise |osses due lo Tine Va|ue. Three
davs |aler, inveslors shou|d revisil lheir inveslnenl slralegies. f lhe range of novenenl
in lhe under|ving assel differs fron expeclalion, an inveslor shou|d exercise discip|ine and
se|| lhe warranls.
2. Purchase Price
The price of a warranl is dependenl on a nunber of faclors, such as novenenls in under|ving
assel, np|ied Vo|ali|ilv, oulslanding quanlilv and so on. Before deciding lo purchase a
warranl, an inveslor shou|d sel a cerlain percenlage be|ow or above lhe purchase price
(based on aclua| condilions as a slop|oss/slopgain |eve|. Such wou|d be nore appropriale
lhan pure|v observing lhe novenenl of lhe under|ving assel.
15
HSBC2527_booklet_e08 4/8/08 1:43 AM 18
16
ExampIe
Assuning: Exercise Price of Ca|| varranl on ABC Conpanv is HKD20.00
Conversion Falio: !0:!
C|osing price belween 25Ocl and 0!ov:
HKD!9.30, HKD20.50, HKD20.00, HKD2!.60, HKD20.20
Sell|enenl price of each warranl:
|(!9.30 + 20.50 + 20.00 + 2!.60 + 20.20/5| 20.00/!0=HKD0.042
The Strategies - Nine
How to CaIcuIate Gains and Losses
Assuning an inveslor se||s lhe warranl on lhe |asl lrading dav, lhe ca|cu|alion of gains/|osses
wou|d be lhe sane as buving and se||ing shares, which is:
Cains/Losses = (se||ing price purchase price x nunber of shares he|d
f an inveslor ho|ds lhe warranl unli| nalurilv, lhen lhe sell|enenl price wou|d be equa| lo
lhe se||ing price of lhe warranl. The fornu|a is:
Cains/Losses = (sell|enenl price purchase price x nunber of shares he|d
f lhe warranl is Allheonev or Ouloflheonev, sell|enenl price wou|d becone 0 and
lhe inveslor wou|d |ose a|| inveslnenls (purchase price x nunber of shares he|d.
l is sinp|e lo ca|cu|ale sell|enenl price. Lels use a slock warranl lo i||uslrale lhis. Sell|enenl
price wi|| be lhe average c|osing price of lhe 5 lrading davs prior lo lhe nalurilv dale ninus
Exercise Price (for ca|| warranls/sublracling fron Exercise Price (for pul warranls, and lhen
divided bv Conversion Falio. l shou|d be noled lhal lhe c|osing price on lhe nalurilv dale
wou|d nol be used lo ca|cu|ale sell|enenl price.
HSBC2527_booklet_e08 4/8/08 1:43 AM 19
17
For index warranls, lhere is no need lo use 5 davs lo ca|cu|ale lhe sell|enenl price. Sinp|v
use lhe sane nonlh expirv index fulures conlracl on lhe sell|enenl dav (EAS, which is lhe
5ninule average price of lhe index. Take lhal figure and ninus Exercise Price (for ca||
warranls/sublracl il fron Exercise Price (for pul warranls and lhen divide lhe nunber bv
Conversion Falio.
'The exanp|e is for i||uslralive purposes on|v and is nol indicalive of fulure relurns.
Sunday Monday Tuesday Wednesday Thursday Friday Saturday
11.0/ 12.0/ 13.0/ 14.0/ 15.0/ 16.0/ 17.0/
18.0/ 2/.0/ 20.0/ 0.00 1.00 2.00 3.00
4.00 5.00 6.00 7.00 8.00 0/.00 00.00
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The Strategies - Nine
HSBC2527_booklet_e08 4/8/08 1:43 AM 20
: <C>:H>H LB IB FE
HSBC2527_booklet_e08 4/8/08 1:43 AM 21
Vision - One
was oplinislic on lhe price perfornance of a cerlain slock and inlend lo gain lhe naxinun
profils. he|d a warranl unli| lhe nalurilv dale and lhen so|d il. How cone lhe lrading of
lhe warranl was suspended on lhe nalurilv dale? l was an nlheonev warranl indeed!
Answer: vhelher a warranl is Ouloflheonev, Allheonev or nlheonev, inveslors
are nol a||owed lo buv or se|| lhe warranl on lhe nalurilv dale. f an inveslor does
nol wanl lo ho|d lhe warranl unli| lhe nalurilv dale lo wail for ils aulonalic sell|enenl,
he/she shou|d se|| lhe warranl before lhe |asl lrading dav, being lhe fourlh lrading
dav (lhe second price ca|cu|alion dav preceding lhe nalurilv dale. f lhe inveslor
has nissed lhe chance of se||ing on lhe |asl lrading dav, he/she wi|| have no choice
bul lo wail passive|v for lhe conp|elion of sell|enenl. f lhe warranl expires n
lheonev, genera||v lhe issuer wi|| pav lhe sell|enenl anounl in lwo lo lhree lrading
davs afler lhe nalurilv dale.
19
HSBC2527_booklet_e08 4/8/08 1:43 AM 22
Vision - Two
vow, lhe ca|| warranl on ABC is so expensive lhal lhe preniun is a|nosl !0'. On lhe
conlrarv, lhe ca|| warranl on XYZ is nore affordab|e, ils on|v 6'. Lels purchase lhe ca||
warranl on XYZ!
Answer: Preniun refers lo whal percenlage lhe under|ving assel has lo rise (for ca|| warranls
/fa|| (for pul warranls for a warranl inveslor lo becone breakeven if he/she purchases
lhe warranl al spol and ho|ds il unli| lhe nalurilv dale. The fornu|a is as fo||ows:
2
|Exercise Price + (varranl Price x Conversion Falio|
Under|ving Assel Spol Price
Ca|| varranl preniun =
Under|ving Assel Spol Price
x !00'
Under|ving Assel Spol Price
|Exercise Price (varranl Price x Conversion Falio|
Pul varranl preniun =
Under|ving Assel Spol Price
x !00'
n lheorv, lhe |ower lhe preniun, lhe c|oser lhe spol price of lhe under|ving assel is lo lhe
breakeven poinl. The assel wou|d on|v need a sna|| range of rise/fa|| lo enab|e lhe inveslor
lo becone breakeven or even gain profils. However, nosl inveslors wou|d on|v ho|d warranls
for a verv shorl period of line and se|| lhen oul before lhe nalurilv dale in order lo slop |osses
/gains. n lhis case, using preniun lo ca|cu|ale lhe |eve| of lhe breakeven poinl does nol
le|| nuch in rea|ilv. or can il be used lo assess whelher lhe warranl is va|uefornonev.
oreover, lo sing|e oul lhe conparison of Preniun |eve| belween warranls, an inveslor nav
lherefore over|ook lhe differences in various aspecls such as nalurilv dale, np|ied Vo|ali|ilv,
and so on. vilh regard lo lhe ca|| warranl on ABC as nenlioned above, a|lhough ils Preniun
is as high as !0', il nav be naluring in six nonlhs. For lhe ca|| warranl on XYZ which has a
6' Preniun, il nav expire in jusl lwo weeks. l is possib|e lhal lhe np|ied Vo|ali|ilv of XYZ
is nuch higher lhan lhal of ABC!
Therefore, inveslors do nol need lo |ook for warranls wilh |ow Preniun in a de|iberale nanner.
nslead, lhev shou|d focus on conparing np|ied Vo|ali|ilv (and lake lhal as a slandard of
delernining whelher lhe warranls are expensive or nol, and lake nole of c|auses such as
Exercise Price, Effeclive Cearing, lern and so on.
HSBC2527_booklet_e08 4/8/08 1:43 AM 23
Vision - Three
vhal nakes lwo warranls wilh lhe sane under|ving assel, sane Exercise Price and nalurilv
dale have differenl sell|enenl prices? Hasnl lhe issuer gained lhe spread of np|ied Vo|ali|ilv
in lhe price of lhe warranls? How cone lhere is an addiliona| charge?
Answer: This is nain|v because lhe lwo warranls of lhe sane under|ving assel have differenl
Conversion Falios. n parlicu|ar, index warranls under|ined bv lhe Hang Seng ndex
and Hang Seng China Enlerprises ndex differ in Conversion Falio nore significanl|v.
This is nol a naller of charging an addiliona| fee.
Exanp|e':
21
<OZZ MO``O\b : ]\ :;< <][^O\g
Exercise Price: HKD35.00
Conversion Falio: !:!
alurilv Dale: 26Ocl06
Sell|enenl Price: HKD36.33
Sell|enenl Price of each warranl:
(36.3335.00/!=HKD!.33
<OZZ MO``O\b ; ]\ :;< <][^O\g
Exercise Price: HKD35.00
Conversion Falio: !0:!
alurilv Dale: 26Ocl06
Sell|enenl Price: HKD36.33
Sell|enenl Price of each warranl:
(36.3335.00/!0=HKD0.!33
Because !0 varranl B wi|| be needed lo conlro| one share of ABC Conpanv, hence,
lhe aclua| sell|enenl price is jusl !0' of varranl A.
'The exanp|e is for i||uslralive purposes on|v and is nol indicalive of fulure relurns.
HSBC2527_booklet_e08 4/8/08 1:43 AM 24
Vision - Four
As an inveslnenl loo| wilh a |everaging fealure, lhe |ower lhe price of a warranl, lhe higher
lhe gains for each unil change in price. Therefore, lhose be|ow!0 cenlswarranls are lhe
warranls lo largel. Olherwise, lhere is no wav lo nu|lip|v lhe profils!
Answer: Be|ow!0 cenlswarranls (i.e. warranl price |ower lhan !0 cenls usua||v are lhose
Ouloflheonev warranls which wi|| expire in a verv shorl period of line. The
chance of nol being ab|e lo exercise evenlua||v is exlrene|v high. Therefore, lhev
are of a high|v specu|alive fealure. n facl, an inveslor slands |ill|e chance of winning
bv purchasing be|ow!0 cenlswarranls because he/she has lo face high inveslnenl
risks. There are lwo najor risks lo be encounlered:
!. Tine decav: Tine decav of a shorllern Ouloflheonev warranl cou|d reach a
coup|e of percenlage poinls on a dai|v basis. Even lhe price of lhe
under|ving assel renains unchanged, lhe warranl price wi|| sli|| go
down.
2. Low De|la: Be|ow!0 cenlswarranls are nosl|v Ouloflheonev, and so lhev
nav have a verv |ow De|la which is c|ose lo 0. This neans lhal for
everv unil change in price of lhe under|ving assel, lhe warranl price
nav nove verv |ill|e or even renain unchanged. Un|ess lhe under|ving
assel experiences a huge f|uclualion, for inslance lhe warranl changes
fron Ouloflheonev lo Allheonev or even nlheonev,
olherwise an inveslor slands a verv high chance of |osing.
22
HSBC2527_booklet_e08 4/8/08 1:43 AM 25
Vision - Five
vhal nakes lhe price of cerlain warranls being |ower lhan lheir nlrinsic Va|ue? vhi|e lhe
nalurilv dale is sli|| a coup|e nonlhs awav, il cannol be juslified lhal lhe line va|ue has
conp|ele|v gone. l is jusl loo ridicu|ous if lhe nlrinsic Va|ue has nol been fu||v ref|ecled as
we||!
Answer: vhen lhe nlrinsic Va|ue of a warranl is |ower lhan lhe difference belween lhe price
of lhe under|ving assel and ils Exercise Price, such is soca||ed "negalive Preniun"
silualion. This is allribuled lo a nunber of faclors:
!. The under|ving assel is c|ose lo exdividend, bul since lhe warranl has a|readv
laken inlo accounl lhe dividend faclor in lhe firsl p|ace, such dividend wi|| nol be
ref|ecled in lhe warranl price.
2. The warranl is c|oser lo nalurilv.
3. The lrading of lhe warranl is verv inaclive, so lhal il is unab|e lo nake adjuslnenls
bv c|ose|v fo||owing lhe dai|v novenenl of lhe under|ving assel.
4. The warranl is an exolic warranl.
23
Vision - Six
have noled on newspaper lhal lhe nane of a warranl is "HSABC@EC03!2C", whal exacl|v
does lhis slring nean?
HS warranl issuer, HS inp|ies lhal lhe warranl is issued bv HSBC
ABC under|ving assel
@ cash sell|enenl
E warranl lvpe, E refers lo European slv|e, A is Anerican slv|e, X is exolic warranl
C ca|| warranl, pul warranl wi|| have a P
0812 refers lo lhe naluring vear and nonlh of lhe warranl, check lhe |isling docunenl
of lhe warranl for lhe exacl dale
C An a|phabel behind lhe vear and nonlh represenls lhe sane issuer having issued
nore lhal one ca|| warranl/pul warranl in lhe narkel wilh lhe sane under|ving assel
and naluring in lhe sane nonlh and vear
HSBC2527_booklet_e08 4/8/08 1:43 AM 26
Vision - Seven
s buving and se||ing warranls an a||wealher business?
Answer: o. vhen lhe narkel does nol show a c|ear direclion and np|ied Vo|ali|ilv is prone
lo fa||, neilher buving nor se||ing warranls is appropriale. nveslors shou|d wail for
lhe prine line lo invesl.
24
Vision - Eight
have accurale|v predicled lhe direclion of a cerlain slock/index bul lhe re|evanl warranl price
did nol rise according|v? vhal is lhe reason behind? s lhe issuer suppressing lhe price?
Answer: There are nanv reasons whv lhe warranl price does nol fo||ow lhe upward novenenl
of lhe under|ving assel. Connon silualions inc|ude:
!. np|ied Vo|ali|ilv is fa||ing.
2. The warranl is Ouloflheonev, and lhus has a verv |ow De|la.
3. The rise in nlrinsic Va|ue is unab|e lo cover line decav.
4. The lrading of under|ving assel or warranls has been inaclive.
HSBC2527_booklet_e08 4/8/08 1:43 AM 27
Vision - Nine
f a conpanv is going lo pav a specia| dividend, does il nean lhal an inveslor who previous|v
he|d ca|| warranls on such conpanv wi|| face huge |osses?
Answer: vhen an issuer delernines lhe |isling price of a warranl, faclors such as dividends
lo be paid bv lhe under|ving assel wou|d have been laken inlo accounl. n facl, lhe
warranl issuer wou|d have eslinaled in advance fron lhe |aunch dale lhrough nalurilv
dale how nanv lines lhe conpanv nav pav dividends and how nuch nav be paid
in lola|. Of course, paving a specia| dividend is an unusua| acl lo lhank shareho|ders
in relurn, which is sonelhing an issuer cannol easi|v predicl in advance. Therefore,
lhe warranl price does nol ref|ecl such a faclor. vhen paving a specia| dividend,
norna||v an issuer wou|d nol adjusl lhe Exercise Price
n lheorv, lhe range of change in warranl price can be ca|cu|aled bv lhis fornu|a:
specia| dividend x De|la.
However, genera||v lhe price of lhe under|ving assel wi|| rise because il wi|| be
slinu|aled bv lhe news of paving a specia| dividend. Such a slinu|alion nav gradua||v
equa| oul faclors unfavorab|e lo a ca|| warranl or di|ule faclors favorab|e lo a pul
warranl. Therefore, an inveslor who purchased a re|evanl ca|| warranl before lhe
conpanv paving a specia| dividend nav nol suffer greal |osses as anlicipaled.
25
HSBC2527_booklet_e08 4/8/08 1:43 AM 28
26
Introduction to HSBC Warrant Website
"nvesl in know|edge before invesling in narkel". For lhose of vou inlending lo invesl in
warranls, good preparalion prior lo laking anv aclions wou|d cerlain|v give vou a higher chance
of success lhan olhers. HSBC warranl websile (www.warranls.hsbc.con.hk offers vou lhe
|alesl news of lhe warranl narkel, warranl infornalion, as we|| as a warranl handbook especia||v
for novices. This oneslop websile inc|udes evervlhing vou need!
HSBC varranl vebsile Honepage
HSBC2527_booklet_e08 4/8/08 1:43 AM 29
27
varranl Search
arkel Dala
Warrant Search
ol sure how nanv warranls are avai|ab|e in lhe narkel? Warrant Search a||ows vou lo search
for suilab|e warranls based on crileria such as issuer, under|ving, warranl lvpe, induslrv and
so on!
Market Data
nfornalion on |alesl HSBC warranls |isl, nosl aclive HSBC warranls, lop len gainers and
|osers, oulslanding quanlilv, lop len nosl lraded warranls, under|ving dislribulion as we|| as
wor|d indices are a|| in Market Data! You wi|| be ab|e lo c|ose|v nonilor lhe warranl narkel
and becone on lop of il!
HSBC2527_booklet_e08 4/8/08 1:43 AM 30
2
Ouick varranl Search
Oulslanding Ouanlilv
Ouick Warrant Search
One slep ahead of olhers when checking parlicu|ar warranl infornalion!
f vou have fo||owed lhe lrend of a parlicu|ar warranl, vou can kev in lhe warranl code direcl|v
inlo lhe "Warrant Search" fie|d on lhe lop righlhand corner of lhe webpage (as shown in
b|ue circ|e be|ow. You can lhen furlher exanine lhe price, lechnica| dala and olher basic
infornalion of lhe warranl.
Outstanding Ouantity
Using Outstanding Ouantity, vou can check oul warranl lurnover for lhe pasl few lrading
davs, |iquidilv providers (LP buv/se|| quanlilies, as we|| as oulslanding quanlilv.
HSBC2527_booklet_e08 4/8/08 1:43 AM 31
29
HSBC varranl Handbook (Bi|ingua|
HSBC Warrant Handbook IBiIinguaII
Sudden|v forgel inporlanl warranl lernino|ogies when browsing lhe websile? Afler checking
HSBC Warrant Handbook IBiIinguaII, queslions fron re|evanl lernino|ogies lo how lo se|ecl
warranls and sell|enenl nelhods wou|d be reso|ved inslanl|v!
HSBC2527_booklet_e08 4/8/08 1:43 AM 32
DiscIaimer
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