**1. The probability of expiring in-the-range**

Theoretically, at expiry, if the Inline Warrants remain in-the-range, investors will receive HK$1.00 per Inline Warrant; or else, if they expire out-of-the-range, investors will still receive HK$0.25 per Inline Warrant. The greatest probability that the Inline Warrants would be in-the-range occurs when the underlying asset price is almost at the mid-way of the upper and lower strike prices. In theory, this shall be the highest price point for Inline Warrants. Noting that the farther away the underlying asset price is from the mid-way of the upper and lower strike prices, the lower the value of the Inline Warrants. Conversely, when the underlying asset price is moving towards the mid-way from the upper or lower strike prices, the price of Inline Warrants will increase. Suppose an in-the-range Inline Warrant is approaching its’ expiry, the value of the Inline Warrant will increase, vice versa.

**2. Time**

When the underlying asset price is within the upper and lower strike prices (namely, “In-the-range”); a shorter time to expiry means the probability for the investors of getting HK$1.00 per Inline Warrant held will be greater, thus implies higher time value and a higher Inline Warrant price. Conversely, if the underlying price is out-of-the-range, the time value will drop.

**3. Implied volatility**

Applying the same principle, when Inline Warrant is in-the-range, a decrease in implied volatility of the underlying will result in a higher probability of the underlying asset value remaining in-the-range, therefore, for in-the-range Inline Warrant, a lower implied volatility will favour its’ value; conversely, an increase in implied volatility will result in higher probability of the underlying asset value moving out-of-the-range, the value of Inline Warrant will decrease. For out-of-the-range Inline Warrant, the situation will be in the opposite. If there is an increase in implied volatility, meaning a higher volatility of the underlying asset value, the probability of the underlying asset value moving in-the-range will be higher, thus the value of Inline Warrant will increase.

**4. The range **

If the range between the upper and lower strike prices of the Inline Warrants is wider, assuming other factors remain constant, the probability for the Inline Warrants remaining in-the-range is higher, resulting in a higher value of Inline Warrants. Conversely, if the range between the upper and lower strike prices is narrower, the probability for the Inline Warrants remaining in-the-range is lower, thus implying a lower value of the Inline Warrants. The range between the upper and lower strike prices is pre-determined upon issuance, and shall not be changed (except for special circumstances like placing and rights issues).

Factors affecting the prices of Inline Warrants and Standard Warrants:

Factor | Price of Inline Warrants | Price of Standard Warrants |
---|---|---|

In-the-range/out-of-the-range - Towards in-the-range - Towards out-of-the-range |
When underlying asset trades towards the mid-way: Increase When underlying asset is moving away from the mid-way of the range: Decrease |
Increase Decrease |

Closer to expiry | When underlying asset remains in-the-range: Increase When underlying asset remains out-of-the-range: Decrease |
Decrease |

Lower implied volatility | When underlying asset remains in-the-range: Increase When underlying asset remains out-of-the-range: Decrease |
Decrease |

This shows that, the impact of time value and implied volatility to Inline Warrants is determined by whether the Inline Warrants remain in-the-range or out-of-the-range, which is different from the pricing concept of Standard Warrants.

Certainly, like other derivatives, factors including but not limited to: liquidity of the underlying asset, the outstanding quantity of, and demand for the Inline Warrants, the interest rate volatility and unexpected dividend shall affect the prices of Inline Warrants. Apart from that, investors shall assess the creditworthiness of the issuer; all Inline Warrants are issued by issuers, shall the issuers become insolvent or default, investors may not be entitled to recover all or even part of the amount due, investors thus shall purchase the product from a creditworthy Issuer.

Generally speaking, risk for investing Inline Warrants is lower than that of Standard Warrants and Callable Bull / Bear Contracts (“CBBCs”). Initially, when the underlying price is trading in-the-range, with a lower implied volatility and time value, the price of Inline Warrants will increase; conversely, for Standard Warrants, no matter it is for In-The-Money or Out-of-The-Money, the implied volatility and time decay will only bring a negative impact.

For CBBCs, when the price of the underlying asset touches the “Call Price”, a Mandatory Call Event will be triggered, and trading will be terminated with immediate effect, even though the index bounce back soon after touching the call level, such Hang Seng Index bull and or/bear contract will be called regardless.

However for Inline Warrants, even it remains out-of-the-range at expiry, investors are still entitled to receive a cash settlement of HK$0.25 per Inline Warrant held.

Worthwhile to note is that, when Inline Warrants is out-of-the-range, even though the underlying asset price almost exceeds the lower strike price or goes below the upper strike price; if there is a drop in the implied volatility, the rise in the price of the Inline Warrants maybe offset. If an Inline Warrant is deep “out-of-the-range”, the price of the Inline Warrant may turn to insensitive to the price of the underlying asset, even though the underlying price is approaching in-the-range, plausibly the price of Inline Warrant will not match investors’ expected price level.

- - 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.