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Introduction to inline warrants

Inline Warrants is a type of warrant which possesses largely the characteristics of Standard Warrants such as gearing in the hope to make big gains with a small investment. Nevertheless, the greatest discrepancy between the two is that, Standard Warrants will benefit investors as long as the investors have a correct estimation in which way the price of assets move, their potential gain will depend on the percentage change of the underlying asset price; whilst for Inline Warrants, at expiry, investors must be able to receive a fixed pre-determined cash amount. If the settlement price falls at or within the range of upper and lower strike prices, both inclusive, if in-the-range, investors would get a fixed pre-determined cash amount of HK$1 per Inline Warrant held; and if out-of-the-range, investor would receive a fixed pre-determined cash amount of HK$0.25 per Inline Warrant held.

Traditional investment products and the derivatives trading in Hong Kong usually benefit from the ‘buy-low, sell-high’ theory; whilst for Standard Warrants, it magnifies the return by gearing for which additional gain or loss will be shouldered. However, for Inline Warrants, it also allows investors to capitalize on a low-volatility of underlying assets, meaning that this derivates is particularly suitable in relatively stable environment.

More specifically, Inline Warrants sets the underlying asset price a pair of upper and lower strike prices, which form a corridor within which the settlement price must remain at expiry, i.e. “in-the-range”. This product does not trigger a Mandatory Call Event no matter how many times the price of the underlying asset exceeds the upper strike price or goes below the lower strike price before expiry. Inline Warrants is traded freely before expiry. At expiry, Inline Warrants is settled and a payoff of fixed pre-determined cash amount will be determined. The settlement price for Inline Warrants over single equities (i.e. stock) will be calculated as the average of the closing prices of the underlying for 5 trading days immediately preceding expiry day. Whilst for Inline Warrants over index would take the Estimated Average Settlement (EAS) Price, calculated based on settlement price on the expiry month. EAS price is the average of quotations of index futures levels taken at 5 minutes intervals throughout the trading session of the index futures.

At expiry, there are two possible scenarios for the potential payoff:

Scenario 1: In-the-range: If the settlement price at expiry is at or falls within the upper and lower strike prices (both inclusive), investors will receive a fixed pre-determined cash amount of HK$1.00.

Under scenario 1, as the 5-day average closing price of the underlying is $327.50 which lies in-the-range of $300-$350, the fixed pre-determined cash amount will be HK$1.00.

Scenario 2: Out-of-the-range: If the settlement price at expiry falls outside the upper or lower strike price, investors will receive fixed pre-determined cash amount of HK$0.25.

Under scenario 2, as the 5-day average closing price of $375.1 is out-of-the-range, which falls outside the upper strike price of $350, the fixed pre-determined cash amount will be HK$0.25.

Why Inline Warrants?

The two biggest merits for investing in Inline Warrants are as follows:

  • Designed for a relatively stable market environment, strengthen trading strategy
    Standard derivatives take advantage of volatile markets for maximising gains, if the environments turn to be that of lower volatility, or even to slumbering market volatility, investors will suffer from time decay. In this low-volatility environment, even investors are investing in single equities (i.e. shares), it is not easy to get good return. Unlike traditional investment products, which create positive returns when the underlying asset value increases/decreases, Inline Warrants provide positive returns if the underlying asset value remains in-the-range, time value will rise, thus suitable in making profits in a sideways or flat market. That is to say, Inline Warrants will complement the Hong Kong existing structured products suite that already includes Standard Warrants and Callable Bull/Bear Contracts (“CBBCs”), investors can choose from a wide range of products based on the volatility of the environments, if the market is volatile, investors can choose to invest in Standard Warrants and/or CBBCs; whilst for a range-bound environment, investors can pick Inline Warrants, to form various investment strategies. This is because, for Standard Warrants, volatility of single equities (i.e. stock) appears as a major factor in determining the return; whilst for Inline Warrants, investors are benefited from the stability of the underlying asset value, usually over indices or single equities (i.e. stock).
  • Ease of trade, lower cost
    Similar to Standard Warrants and CBBCs, Inline Warrants is a securitized product, investors can easily enter and exit their trade. Investors only require a securities trading account for trading. At expiry, Inline Warrants will be settled automatically, and the fixed pre-determined cash amount will be paid to account directly on the third trading day after the expiry day, thus very cost and time effective. The investment cost for Inline Warrants is indifferent from Standard Warrants and CBBCs; for which all of them are not subject to any stamp duty (0.1%), and the capital outlay is comparatively less than investing in stocks.

However, investors shall be cautious that the price of the derivatives products may fall in value as rapidly as it may rise and investors may sustain a substantial loss of their investment, investors shall thus make their own assessment before making any investment decision.

Important Risk Warning
  • - This is a non-collateralised structured product.
  • - The price of Structured Products generally may fall in value as rapidly as they may rise and you should be prepared to sustain a significant or total loss of the purchase price of the Structured Products.
  • - You should ensure that you understand the nature and risks and seek professional advice where applicable.