Derivative Warrants

A derivative 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. Derivative warrants can be issued over a range of assets, including stocks, stock indices, currencies and commodities or a basket of assets. The list of eligible stocks for warrants over single stock is posted on the HKEX’s website. However, investing in a derivative warrant does not give you any rights in or to the underlying asset. Currently, all derivative warrants are cash settled when exercised on expiry. 

There are two types of derivative 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 derivative warrants.

(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 derivative warrants. 

Typically, derivative warrants in Hong Kong are issued with a life span of six months to two years, but are usually traded by investors before expiry. Derivative warrants magnify your investment through leverage. This carries significant opportunities as well as significant risks. Derivative 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. 

Derivative warrant is a special form of option in which an investor can only take a long position in the derivative warrant, just like option buyers. This means you can only take a long position in a call or a put warrant by buying such derivative warrant and close out such long position previously established by selling such derivative warrant – that is, you cannot short sell such derivative warrant. Your maximum loss will therefore be limited to the amount you pay for the derivative warrant (plus any transaction costs, such as broker fees associated with your investment).

This depends on the type of warrant you buy (call versus put). The following examples deal with either a call or put warrant linked to a local stock. 

(a) Call warrant - At the expiry of a call warrant over a local stock, if the 5-day average closing price of the underlying stock before the expiry date is: 

i. higher than the warrant's exercise price, the warrant is "in-the-money" and will be exercised automatically at expiry. In that case, you will receive a cash payment calculated by reference to the positive difference between that 5-day average closing price and the exercise price of the call warrant, adjusted by the entitlement ratio; or 

ii. equal to or lower than its exercise price, the warrant is “at-the-money” or “out-of-the money”, respectively, and will become worthless.

(b) Put warrant - At the expiry of a put warrant over a local stock, if the 5-day average closing price of the underlying stock before the expiry date is:

i. lower than its exercise price, the warrant is "in-the-money" and will be exercised automatically at expiry. In that case, you will receive a cash payment calculated by reference to the positive difference between the exercise price and that 5-day average closing price, adjusted by the entitlement ratio; or 

ii. equal to or higher than its exercise price, the warrant is “at-the-money” or “out-of-the money”, respectively, and will become worthless.

There are various types of warrants in the market.  Exotic warrants carry exotic features and their terms may be more complicated than derivative warrants.  An exotic warrant is usually identified with an “X” in its English stock short name.  For more details, investors should refer to the listing documents and seek independent professional advice.

The following table describes the key differences between derivative warrants, inline warrants and CBBCs.

Investing in derivative warrants is not suitable for everyone. Derivative warrants involve a high degree of risk and you must be comfortable with that risk before investing. The relevant listing documents disclose the key risks applicable to the relevant derivative warrants. You must consider and understand those risks. You must also be able to assume the risks, which includes being financially able to bear the potential losses in a “worst case” scenario. 

Generally speaking, the key risks include the following:

(a) Non-collateralisation - Derivative warrants are not secured by any asset of the issuer or the guarantor (if any) or supported by any other collateral. 

(b) Credit risk - Holders of derivative 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. When you purchase derivative warrants, you are relying upon the creditworthiness of the issuer and/or a guarantor (if any). You can access information about issuers’ (or their guarantors’) credit ratings on their own website or the HKEX’s website.

(c) Gearing risk - Although these products often cost less than the underlying assets, they may change in value to a much greater extent than the underlying assets. Although the potential return on such products may be higher than that on the underlying assets, in the worst case the value of these products may fall to zero and holders may lose their entire investment amount.

(d) Limited life - Unlike stocks, derivative warrants have an expiry date and therefore a limited life.

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

(f) Market forces - In addition to the basic factors that determine the theoretical price of a derivative warrant, prices of derivative warrants are also affected by the demand for and supply of the derivative warrants. This is particularly the case when the existing issuance of a single series of derivative warrants are almost sold out and when there are further issues in that single series of derivative warrants. 

(g) Turnover ‐ High turnover should not be regarded as an indication that the price of a derivative warrant will go up. The price of a derivative 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.

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

(i) 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. For example: 

i. the spread between bid and ask prices quoted may be significantly wider than its normal standard;
ii. the quantity for which liquidity will be provided by the liquidity provider may be significantly smaller than its normal standard; and
iii. the liquidity provider’s response time for a quote may be significantly longer than its normal standard.

(j) Corporate action of the underlying stocks - Corporate actions affect the value of the underlying stocks which in turn affect the value of the derivative warrants. Adjustments may or may not be made to the terms of the derivative 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.

The prices of the derivative warrants may be volatile from the ex-entitlement date of the underlying stocks until the Effective Date. You should exercise particular caution in trading those derivative warrants during that period. In addition, no adjustment will be made to those derivative warrants that expire within that period.

You should read carefully the risk disclosure in the relevant listing documents of the derivative warrants before investing in such products.

The issuer’s existing derivative warrants are still valid and you can continue to trade them through the Exchange trading system. The issuer must publish an announcement regarding the credit rating downgrade and continue to provide liquidity for its existing derivative warrants and perform its settlement obligations upon expiry.

You should be cautious that prices of derivative warrants issued by the affected issuer may be affected by its or its guarantor’s credit downgrade.

However, when an issuer no longer meets the eligibility requirements in the Listing Rules, the issuer will not be allowed to launch new issues or further issues. It must apply for the withdrawal of derivative warrants launched but not yet listed and all derivative warrants with no outstanding positions held by the public.

No, derivative warrants are not eligible for trading in closing auction session and their market closing time is 4:00 p.m.

However, some underlying securities are eligible for trading in closing auction session and the closing level of the relevant index will be ascertained after 4:10 p.m. (or 12:10 p.m. in the case of half day trading) (“eligible underlying asset”). As a result, the market closing time for a derivative warrant and its underlying asset can be different. In this case, the price or level of eligible underlying assets may move in closing auction session while investors cannot buy or sell related  derivative warrant. 

Since the affected underlying security or index is not suspended and continues to trade within a specified price limit during the 5-minute cooling off period after the triggering of the VCM, the derivative warrant can still be traded without any price limit. You can access information about VCM on the HKEX’s website.

However, investors should note that where events surrounding VCM cause abnormal trading behavior of the underlying leading to hedging difficulties, the liquidity provision obligations of issuers could be exempted. In this case, there may be a temporary absence of price quotes, a reduction in quote size, or a wider bid-ask spread during the 5-minute cooling-off period.

VCM is a dynamic price limit model applied at the individual instrument level. Where the price deviates more than a predefined percentage within a specific time frame, the instrument will trade within band during a 5-minute cooling off period. This provides a window allowing market participants to reassess their strategies, if necessary. It also helps to re-establish an orderly market during volatile market situations.

If a cash settlement amount is payable by an issuer at expiry but the issuer defaults in its payment obligation, you can claim as an unsecured creditor against the issuer, and if the product is guaranteed, also against the guarantor.

None of the  derivative warrants currently listed on the Exchange is collateralised. This means that there is no specific security or asset to back up the obligations of the issuer or guarantor. If the issuer or its guarantor (if any) becomes insolvent or default, you may not recover all or even part of the amount due (if any).

(a) Exchange rate risk 

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

(b) Different trading hours between the underlying exchange on which the overseas underlying assets are traded and the Exchange 

If trading in the overseas underlying assets is suspended on the underlying exchange, trading in the derivative warrants will be suspended for a similar period. 

The trading hours of the underlying exchange (based on Hong Kong time) are likely to be different from the trading hours of the Exchange. Trading in the overseas underlying assets on the underlying exchange may be suspended during non-trading hours of the Exchange. Such suspension may be lifted, and trading may resume, during non-trading hours of the Exchange. 

If trading in the overseas underlying assets on the underlying exchange is suspended, trading in the derivative warrants on the Exchange will not be automatically suspended – in such case, the market price of the derivative warrants may fluctuate significantly until trading in the derivative warrants on the Exchange is suspended. If trading in the overseas underlying assets on the underlying exchange resumes following a suspension, trading in the  derivative warrants on the Exchange will not be resumed automatically and you will not be able to trade the derivative warrants until trading in the derivative 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. You should be aware of the time zone difference between Hong Kong and the location in which the underlying exchange is situated in assessing the trading price of the overseas underlying assets. The trading prices of the overseas underlying assets may be volatile in response to the movements on the underlying exchange during which the Exchange is not opened for trading of the derivative warrants. 

(c) 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. 

(d) 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.

You can learn some basic features of a derivative warrants from its stock short name. Below are the naming conventions for reference.

You should note that the above naming conventions are applicable in most cases but not exclusive for all circumstances. The stock short names of derivative warrants indicate some basic information only. You should refer to the relevant listing documents of the product and consult your brokers or investment advisers before trading. Listing documents can be found at the HKEXnews website.

Investors can start to buy derivative warrants on the Exchange from the first listing day of the products. To initiate the listing process,  derivative warrants issuers submit product term sheets to the Exchange for approval on the launch day (“Launch Date”). Commencing from 13 July 2020, the listing cycle has been shortened from five trading days to three trading days following the product launch.

For example:

The listing date will be postponed due to an exceptional situation causing the stock market to (i) close for the entire day; or (ii) close prior to its regular hours on any of the two trading days between launch date and the scheduled listing date. No further notice or announcement will be published in respect of such postponement. Below is an illustrative example in respect of a product launched on Monday with a listing date on Thursday:

Trading of derivative warrants will remain available during typhoon signal number 8 or above or the black rainstorm warning issued by the Hong Kong Observatory, or ‘extreme conditions’ issued by the Hong Kong Special Administrative Region Government.  In addition, structured products issuers will provide active quotes and quote requests for structured products as usual.

However, the Exchange will assess specific circumstances in consultation with the Government and the Securities and Futures Commission to decide whether there is an exceptional situation that warrants the markets, including structured products market, to be closed.  In this case, the Exchange will make relevant announcements as required to provide the market with advanced notice and updates.

Yes. Similar to the trading of shares, transaction fees currently include:

(a)  brokerage commission and fees charged by the relevant broker;

(b)  the transaction levies imposed by the SFC and the Accounting and Financial Reporting Council of Hong Kong; and

(c)  a trading fee charged by the Exchange.

No. Currently, all derivative warrants traded on the Exchange are cash settled and trading in such cash settled derivative warrants are not subject to any stamp duty.

No, trading of derivative warrants linked to the affected indices will be halted as soon as practicable after publication of a notice of such failure by Hang Seng Indexes Company on its website.  Where such notice is published within 15 minutes before the end of a continuous trading session, trading halt will take place in the next continuous trading session.

Trading of the derivative warrants will resume as soon as practicable (which may occur during a trading session) after publication of notice of recovery of normal index level dissemination by Hang Seng Indexes Company on its website.  Where such notice is published within 15 minutes before the end of a continuous trading session, trading resumption will take place in the next continuous trading session.

No, outstanding orders will not be automatically cancelled and will remain valid when trading is resumed on the same day.  Investors should contact their brokers before trading resumption if they wish to cancel their orders of the derivative warrants.

A liquid product has a tradable market with tight bid and ask prices and sufficient size, in which there are opportunities to buy and sell derivative warrants. The provision of liquidity is an important feature of derivative warrants because it allows investors to buy and sell derivative warrants that may otherwise be illiquid (that is, have insufficient supply or demand). Issuers may provide liquidity in respect of their products through a designated liquidity agent (called a “liquidity provider”). In Hong Kong, liquidity providers are commonly known as “market makers”.

Each issuer must appoint one liquidity provider, who must be an Exchange participant, for each of its products.

Most derivative warrants do not have public holdings on their first listing dates. A liquidity provider provides quotations for a particular derivative warrant to support a tradable environment for that product. Such quotations take into account the prevailing market conditions affecting the underlying asset, such as hedging costs and liquidity, spread and volatility of the underlying. Liquidity providers provide liquidity by inputting orders into the trading system of the Exchange when they receive “quote requests”. They do so according to the committed service level set out in the relevant listing document. These standards typically include:

(a)  the maximum response time – i.e. the maximum time it will take to submit a pair of quotes after a request is received;

(b)  the maximum spread between the bid and ask price;

(c)  the minimum quote size; and

(d)  situations in which a quote will not be provided.

Under certain circumstances, liquidity providers are required to provide “active quotes” (that is, even where no request has been submitted by investors) by actively inputting orders into the Exchange’s trading system.

Each liquidity provider is currently identified by a 4-digit broker ID code of 95XX, 96XX or 97XX. The relevant listing documents of an issuer set out the exact obligations of its liquidity provider.

In circumstances where the outstanding quantity of a derivative warrant in the market increases, the liquidity provider may be less active in providing quotes for such derivative warrant. This is because the key role of a liquidity provider is to facilitate liquidity when there is limited or no market liquidity on the derivative warrant (such as when the products are newly listed on the Exchange with limited or no trading by market participants or investors) and to support a tradable environment for the  derivative warrant. If a derivative warrant is not eligible for active quotes due to the fact that there is more than 50% of its aggregate number outstanding in the market, then there may not be any active quote from the liquidity provider. You can find out the outstanding quantity of derivative warrant as of the previous trading day on the HKEX’s website.

Where the number of market participants for a particular product grows, the “market force” increases, and the product becomes less dependent on the liquidity provider as the sole source of liquidity. By implication, the role of the liquidity provider becomes less important when there is a higher number of particular derivative warrant outstanding because this means there are more investors trading in the product, leading to a natural market.

No. Liquidity providers are not required to support prices of derivative warrants. In practice, like other market participants, a liquidity provider is free to buy and sell at any price.

Each series of derivative warrant will have only one liquidity provider appointed for such series.

You can obtain the liquidity provider’s name and contact details in two ways:

(a)  Visit the HKEX’s website: The designated HKEX’s website lists all the liquidity providers for all derivative warrants listed on the Exchange.

(b)  Check the relevant listing documents of the derivative warrant.

Simply contact the liquidity provider directly during trading hours on a trading day at its designated phone number. 

Through the liquidity provider, the issuer takes into account the prevailing market conditions affecting the underlying asset (e.g. hedging costs and liquidity, spread and volatility of the underlying) in the quotations provided to the market.

Not necessarily. Trading derivative warrants is similar to trading stocks listed on the Exchange. Any investor’s bid or ask price may be accepted and traded upon by other investors. You may also place orders just like trading in listed stocks. However, there may not be sufficient interest in trading such derivative warrants.

If the appointed liquidity provider is no longer an Exchange participant, it cannot continue to provide liquidity. The issuer must appoint another liquidity provider in its place.

The Industry Principles set out the best practices on liquidity provision standards for listed derivative warrants, which issuers are required to follow and cannot opt out.

The Industry Principles are general guidance for issuers and are not binding commitments nor do they give rise to enforceable obligations. For example, they do not give investors any specific rights against any issuer.

Occasional failure to comply with the Industry Principles will not in itself render an issuer or its liquidity provider liable to any sanction or enforcement action. That said, compliance with the Industry Principles is relevant to the Exchange’s assessment of an issuer’s suitability to list derivative warrants. The Exchange will actively monitor issuers’ performance and request for explanations why an issuer has not complied with certain Industry Principles.

Quote request is one of the methods in which liquidity is provided. It refers to the provision of liquidity by entering orders into the Exchange’s trading system in response to an investor’s request.

The Industry Principles set out the tightened liquidity standards to be adopted by each issuer in its listing documents. Quote request standards are the minimum service level for all derivative warrants applicable to all possible market conditions (regardless of the underlying assets), subject to certain exemptions set out in the listing documents.

The following table summarises the current service levels.

When a liquidity provider responds to your quote request, it must continue to hold a quotation (which effectively means it must continue to make available an offer to trade for investors) for at least 5 minutes after it is posted on the Exchange’s trading system upon your request. This means that you can accept the quote (that is, agree to trade on that basis) within such 5 minutes, if it has not lapsed (see below).

However, it is important to be aware that even within those 5 minutes, the liquidity provider may need to adjust the bid and ask prices to take into account prevailing market conditions and changes in the price of the underlying asset. If that occurs, the liquidity provider will “refresh its quote” – that is, an adjusted quote will be posted on the Exchange’s trading system.

More importantly, if a liquidity provider’s quote is being traded by another investor within the 5 minute holding time and the quotation lapses, you need to submit another quote request if you wish to trade.

The liquidity provider is not obliged to provide quote upon request in the following key situations:

(a)  during a pre-opening session or a closing auction session (if applicable);

(b)  during the first 5 minutes of each morning session or the first 5 minutes after trading commences for the first time on a trading day;

(c)  when the derivative warrant or any underlying asset is suspended from trading for any reason;

(d)  when there is no derivative warrant available for market making activities;

(e)  if the theoretical value of the derivative warrant is less than HK$0.01;

(f)  where the underlying asset is an index, if there occurs or exists any suspension of, or limitation imposed on, trading of options or futures contracts relating to the index or if the index level is not calculated or published as scheduled for any reason;

(g)  when there are operational and technical problems beyond the control of the liquidity provider that hinder the liquidity provider’s ability to provide liquidity; or

(h)  if there is a “fast market” which materially affects the issuer’s hedging ability.

These circumstances are stated in the relevant listing documents. 

If trading in the underlying asset of a derivative warrant is suspended, trading in such  derivative warrant will also be suspended until trading in the underlying asset resumes. Investors must understand and take into account the risks arising from a loss of time value during a suspension period.

“Fast market” refers to situations where the financial markets experience exceptional price movements and high volatility over relatively short periods of time, which can result in a sudden increase in risk and uncertainty, possibly affecting issuers’ hedging abilities.

For example, these situations may include:

(a)  financial uncertainty - exceptionally volatile market conditions linked to financial uncertainty, for example, the period following Lehman Brothers’ bankruptcy in September 2008 and the “flash crash” of 6 May 2010, when the Dow Jones Industrial Average suffered its worst intra-day point loss; and

(b)  underlying uncertainty - the occurrence of events causing the intraday market price of the underlying stock or index to experience significant fluctuations and/or a material reduction in liquidity of the underlying, for example, Japan’s earthquake on 11 March 2011 which resulted in a drastic fall in Nikkei index in the immediately following period and fluctuation in prices of the related derivative warrants.

These are just possible examples of fast market events. Depending on circumstances, some market events may trigger a VCM which may possibly result in a fast market.

It is generally more difficult to provide quotes momentarily when the price of the underlying asset is changing rapidly within a short period of time.

System difficulties and failures can affect the ability of a liquidity provider to provide quotes within the service level set out in relevant listing documents or provide any quote at all.

A system failure will be notified to the market as soon as practicable and shall be fixed within the shortest possible time.

The issuer will commit to Quote Request obligations during the day, including during the cooling off period, unless an exemption is obtained for Quote Request if there is a “fast market” which materially affects the issuer’s hedging ability.

Active quotes refer to the provision of liquidity where a liquidity provider actively inputs orders into the Exchange’s trading system.

The Industry Principles describe an active quote standard for listed derivative warrants with an active underlying asset, provided certain active quote criteria are met.

For further information, please refer to section 4 of the Industry Principles.

Generally speaking, yes. However, active quotes may not strictly be “continuous” because liquidity providers may need to pause the provision of active quotes for a reasonably short period of time to adjust quote parameters in response to market conditions or operational needs.

Roughly speaking, active quotes should be provided for at least 90% of the time of a trading day for derivative warrants that meet the criteria for active quotes and each pause should not exceed 10 minutes.

No. Unlike quote request, there is no minimum holding time for active quotes.

Issuers are only required to provide active quotes during the “Qualified Period”. This means the period when:

(a)  the active quote criteria set out in paragraph 4.2 of the Industry Principles are met; and

(b)  none of the exemptions set out in paragraph 3.3 of the Industry Principles applies.

Issuers are only committed to providing active quotes for derivative warrants that satisfy the following criteria (as measured on a real time basis):

(a)  an active underlying;

(b)  50% or less of their aggregate number outstanding in the market;

(c)  remaining time to expiry of at least 30 calendar days (for instance, if the expiry date of the warrant is 2 January 2013, active quote should be provided by the liquidity provider up to and inclusive of 3 December 2012) ;

(d)  moneyness between 20% in-the-money and 20% out-of-the money. “Moneyness” is derived by comparing the spot price or level of the underlying and the exercise price or strike level.

For further information, please refer to paragraph 4.2 of the Industry Principles.

A liquidity provider’s quotation for derivative warrants must be based on the actual market conditions. There are three key considerations for an issuer when deciding if active quotes can be provided:

(a)  if the derivative warrant is suitable in terms of demand and risk management;

(b)  if the market conditions affecting the underlying asset, such as its liquidity and the availability of hedging, permit active quotations; and

(c)  the prevailing market conditions affecting the derivative warrant itself, such as supply and demand patterns.

An “active underlying” means local indices (such as the Hang Seng Index and Hang Seng China Enterprises Index) and stocks listed on the Exchange which are eligible for CBBC issuance. These represent stocks with the highest turnover in the market.

CBBC eligible list is generally updated on a quarterly basis and posted on HKEX’s website.

Investors should pay attention to the change in the eligible underlying and the effective date of the eligible list. An underlying previously eligible for CBBC issuance and is removed from the current eligible list will no longer be an “active underlying”. As a result, derivative warrants with that particular underlying will cease to be subject to active quotes commencing on the effective date of the eligible list.

On the other hand, a newly added eligible underlying will become an “active underlying” and will be subject to active quotes commencing on the effective date of the eligible list (assuming the criteria for active quotes set out in paragraph 4.2 of the Industry Principles are all met).

If you want to know whether a particular derivative warrant is eligible for active quotes at any particular time on a trading day, you may contact the issuer to ask if such derivative warrant meets the active quote criteria.

The list of derivative warrants which were eligible for active quotes based on market data as of close of trading on a trading day will be included in each issuer’s daily trading summary published on the next trading day. If you wish to use such market data as a general reference point, please note that such data of derivative warrants is historical.

Such information included in an issuer’s daily trading summary will only show historic data as of the close of trading on the previous trading day for general guidance only. You must not assume that such information is accurate, complete or up-to-date. You should not rely on such historic list as an indication that a derivative warrant listed in such daily trading summary actually meets the active quote criteria at any other time.

The time value of a derivative warrant erodes rapidly towards expiry, making it more difficult to provide active quotes. Active quotes are therefore only able to be provided for a derivative warrant the value of which is not materially affected by the erosion of its time value.

“Moneyness” describes where the derivative warrant’s exercise price or strike level is in relation to the price or level of the underlying asset.

In the case of a call warrant, if the exercise price or strike level is:

(a)  above the price or level of the underlying asset, the warrant is said to be “out-of the-money”; or

(b)  below the price or level of the underlying asset, the warrant is said to be “in-the money”.

Numerically, moneyness of a call warrant is calculated by reference to the difference between the underlying asset’s price or level and the exercise price or strike level, divided by the underlying asset’s price or level, as illustrated in the table below.

In the case of a put warrant, if the exercise price or strike level is:

(a)  below the price or level of the underlying asset, the warrant is said to be “out-of- the-money”; or

(b)  above the price or level of the underlying asset, the warrant is said to be “in-the money”.

Similar to a call warrant, the moneyness of a put warrant is calculated by reference to the difference between the exercise price or strike level and the underlying asset’s price or level, divided by the underlying asset’s price or level, as illustrated in the table below.

Active quotes may not be continuous because liquidity providers may need time to pause the provision of active quotes for a reasonably short period of time to adjust quote parameters in response to market conditions or operational needs.

Common causes of these short interruptions include the following:

(a)  a sudden or material change in the trading pattern of the derivative warrant, such as where a relatively inactive derivative warrant suddenly becomes active;

(b)  news is published that might have an impact on the market price of the underlying. For example, a change in forecast earnings or proposed dividends;

(c)  the underlying or the stock market experiences exceptional price movement or high volatility over a short period of time which materially affects the liquidity provider’s ability to source a hedge or unwind an existing hedge;

(d)  the underlying stock trades at a wider bid-ask spread than normal which causes the spread in the derivative warrant to exceed the maximum level specified in paragraph 4.9 of the Industry Principles;

(e)  the liquidity provider reasonably suspects any potential mispricing, system issue or error;

(f)  the liquidity provider reasonably suspects abnormal trading in respect of the underlying;

(g)  operational and technical problems such as computer network disconnection, loss of data feed, loss of connectivity with the Exchange or technical issues which arise in the issuer’s computer system; or

(h)  the liquidity provider will suffer, or expects to suffer, a financial risk due to frequency of trades and quantity of trades in relation to its derivative warrant.

An issuer may stop providing active quotes for a derivative warrant on a trading day if that derivative warrant no longer meets the active quote criteria stated in paragraph 4.2 of the Industry Principles. Individual issuers may voluntarily decide to keep providing active quotes, or may switch to providing liquidity on a quote request basis in accordance with the minimum liquidity service levels.

The bid and ask spreads for active quote are tighter than the maximum spreads prescribed for quote request. These tightened spreads are as follows:

Spreads for CBBCs are wider than those for derivative warrants because the price of CBBCs is generally more sensitive to movements in the value of the underlying asset, meaning that it is more costly for the issuer to hedge that underlying asset.

Investors should be aware that standards for active quotes described in the Industry Principles are intended to apply to normal market conditions. Provision of active quotes may be affected where there are abnormal or exceptional market conditions.

Quotes provided by liquidity providers necessarily reflect the liquidity of the underlying securities or indices at any given time. If the liquidity of the underlying is impaired by conditions surrounding a VCM event, or by the VCM itself, the liquidity of the  derivative warrant may be adversely affected in terms of quote size and spread relative to more normal market conditions.

During the 5-minute cooling off period after triggering of the VCM, where issuers’ hedging ability is materially affected due to the uncertainty in the underlying securities or index, it is possible that the minimum service level for active quotes will not be fulfilled, such as no bid-ask quotations, widening of bid-ask spread and reduction in quote size.

Similarly, after the 5-minute cooling off period, liquidity provision may still be affected if issuers continue to experience hedging difficulties. Under such circumstances, Liquidity Providers may not fulfil the minimum service level for active quotes as described in the Industry Principles.

However, issuers will use best efforts to meet quote request requirements.

Yes, unless the situation falls within any of the circumstances described in paragraph 3.3 of the Industry Principles.

The quote size offered by the liquidity provider is limited by the actual liquidity of the relevant hedging vehicle (e.g. the underlying asset or the listed or OTC options linked to the underlying asset).  In this case, the liquidity provider may not be able to buy all 1,000 board lots of your call warrants if the liquidity provider cannot unwind such hedging vehicle for all of the 1,000 board lots of your call warrants (for example, because the relevant hedging vehicle is illiquid).  The minimum quote size that a liquidity provider is committed to quote is 20 board lots. 

The last reported price (or the nominal price) is not necessarily the same as the warrant’s actual theoretical value. In this case, the most likely reason is that the actual theoretical value of the call warrant is less than HK$0.01.  This is one of the circumstances in which a liquidity provider is not required to respond to any quote request.

No.  If an existing quote that complies with the minimum service levels is available, the liquidity provider will be deemed to have complied with its liquidity obligations.

The liquidity provider is only required to commit to the minimum service level. If your request for a bid-ask spread reduction is a tighter standard than the minimum service level, the liquidity provider is not obliged, and may not be able, to provide a tighter spread. It is because the bid-ask spread may change from time to time or even widen according to the prevailing market conditions affecting the underlying asset (such as hedging costs and liquidity, spread and volatility of the underlying).

If the liquidity provider has provided active quotes that comply with the spread requirement for active quotes as prescribed in the Industry Principles, it should not be necessary to make a separate quote request for such products as the bid and ask spreads for active quotes are tighter than the maximum spreads prescribed for quote request.

The liquidity provider is exempted from providing liquidity when there is a “fast market” which materially affects the issuer’s hedging ability. “Fast market” refers to situations where the financial markets experience exceptional price movements and high volatility over relatively short periods of time, which can result in a sudden increase in risk and uncertainty, possibly affecting issuers’ hedging abilities.

A significant move in the Hang Seng Index or the overall market may or may not result in exceptional price movement and high volatility of the underlying stock.  In this case, the liquidity provider may need to demonstrate to the Exchange that its hedging ability has been materially affected by exceptional price movement during a short period of time. 

Time to maturity is one of the criteria for active quotes.  As your call warrant has a maturity of less than 30 calendar days, it does not meet the active quote criteria set out in the Industry Principles.  In this case, you could contact the issuer to make a quote request. 

Issuers provide active quotes for call warrants with moneyness between 20% in-the-money and 20% out-of-the-money.  Where the spot price of the underlying stock is HK$50, an exercise price of the call warrant between HK$40 (+20%) and HK$60 (-20%) meets the ±20% moneyness criteria.  In this case, your call warrant should be eligible for active quotes (subject to it meeting the other criteria), as the exercise price of HK$45 falls within the ±20% moneyness range.

Issuers provide active quotes for derivative warrants with moneyness between 20% in-the-money and 20% out-of-the-money.

Where the level of the HSI is 18300, call warrants with strike level between 14640 (+20%) and 21960 (-20%) meets the ±20% moneyness criteria.   In this case, your call warrant does not fulfil the active quote criteria because the strike level of 22900 falls outside the ±20% moneyness range.

As a result, you could contact the issuer to make a quote request if you want to sell your call warrant.

Active quotes will not be provided where one of the exemptions set out in paragraph 3.3 of the Industry Principles applies.  For example, the liquidity providers need not provide active quotes where:

(a) the theoretical value is less than HK$0.01

(b) there is a technical failure and operational problems beyond the control of the liquidity provider; or

(c) the underlying asset or the stock market experiences exceptional price movement and high volatility over a short period of time which materially affects the liquidity provider’s hedging ability.

Remember that active quotes are not continuous. You could contact the liquidity provider, if you have any questions about liquidity.

No.  An issuer may, at its option, provide active quotes voluntarily.  In those circumstances, the issuer is not bound by the specific spread requirements for active quotes as set out in the Industry Principles.  However, in this case, the issuer will still need to comply with the spread requirement applicable to quote request in response to a quote request.

Derivative warrants have a “theoretical value” that may be very different from their traded (nominal) price. The theoretical value is the price of the derivative warrant calculated by reference to the issuer’s pricing model, taking into account all relevant market factors. 

The price of a derivative warrant (i.e. put/call warrant) generally depends on the price of the underlying asset. However, throughout the term of a derivative warrant, its price will be influenced by a number of other factors, including:

(a)  the exercise price of the derivative warrant;

(b)  the value and volatility of the price of the underlying asset (being a measure of the issuer’s expectation on the fluctuation in the price of the underlying asset over time);

(c)  the time remaining to expiry: generally, the longer the remaining life of the derivative warrant, the greater its value;

(d)  the interim interest rates and expected dividend payments or other distributions on the underlying asset;

(e)  the liquidity of the underlying asset;

(f)  the availability of, and demand for, the derivative warrant;

(g)  the issuer’s hedging transaction costs;

(h)  the creditworthiness of the issuer and/or its guarantor; and

(i)  in case of index warrants, the price and liquidity of the futures contracts relating to such index

Assuming other factors remain unchanged, the theoretical impact of changes in certain key factors on call and put warrants is illustrated in the table below:

* Please note that the table above only shows the theoretical relationship with the key pricing parameters. In reality, there are other factors affecting the price of a derivative warrant.

(a)  The price of a derivative warrant is not only affected by the price of the underlying asset but a range of other factors. This means that movements in the price of a  derivative warrant may not be proportionate, or may even be opposite, to the price movement of the underlying asset. For example, for a call warrant, if the price of the underlying asset increases, but the implied volatility of the price of the underlying asset decreases, the price of the call warrant may decrease as the drop in its implied volatility may offset an increase in the price of the underlying asset;

(b)  if a derivative warrant is deep “out-of-the-money” (e.g. when its theoretical value is substantially less than HK$0.01), the price of the  derivative warrant may be insensitive to any increase (in respect of a call warrant) or decrease (in respect of a put warrant) in the price of the underlying asset;

(c)  if the outstanding volume of a series of derivative warrants in the market is high, the supply and demand of the warrant may have a greater impact on the warrant price than the price of the underlying asset;

(d)  in respect of a call warrant, a decrease in time value may offset any increase in the price of the underlying asset, especially when the call warrant is close to its expiry where the time value usually decreases more rapidly; and

(e)  in respect of a put warrant, a decrease in time value may offset any decrease in the price of the underlying asset, especially when the put warrant is close to its expiry where the time value usually decreases more rapidly.

Time value is the value of a derivative warrant arising from the time left to maturity and is equal to the difference between the current derivative warrant price and its intrinsic value. The time value can be considered as the cost paid in return for the gearing effect. In general, the longer the time to expiry, the higher the probability that the underlying price will move in favour of the derivative warrant holder and hence a higher derivative warrant price. However, the time value of a derivative warrant will become zero when the derivative warrant has reached maturity. This is often referred to as the time decay of a derivative warrant.

“Outstanding quantity” means the quantity held by investors and is generally shown as a percentage. It is calculated by dividing the number of derivative warrants held by the market on a particular day (after closing) by the total number of derivative warrants issued. For example, if the number of certain derivative warrants held after closing on a particular day is 90 million and the number of those derivative warrants that had been issued is 100 million, then the outstanding quantity is 90%.

A product with a high outstanding quantity may be more vulnerable to the influence of the forces of market supply and demand. For example, when there is a selling pressure on a product, the price of that product may be squeezed (that is, brought down) by prevailing market forces. The price of the product may also be volatile due to short supply. As a result, its price may not follow the price of the underlying asset very closely.

Issuers are entitled to increase market supply of a derivative warrant where the outstanding quantity exceeds 50%, to prevent price fluctuations caused by short supply. The way this takes place is that the issuer applies to the Exchange for a further issuance of the product.

Further issuance has the potential to bring greater stability to the product price and minimise the chance of price fluctuations caused by the disequilibrium between supply and demand.

The entitlement ratio for a product is the number of such products required to be converted into a unit of the underlying asset at the strike price on the expiry date. Assuming all other factors affecting two different products are the same (underlying asset, strike price, expiry date, volatility etc.), their respective entitlement ratios would directly affect their respective values per unit. Generally, a product with a higher entitlement ratio would have a relatively small value per unit. However, in theory, the entitlement ratio would not affect the performance of a particular product, as it has been calculated into the effective gearing.

The premium reflects the degree by which the price of the underlying asset needs to move before reaching the break-even price of a product at expiry.

For example, if the premium of a call warrant is 10%, the underlying price should rise by 10% at expiry, in order to reach the break-even price.

You can calculate the premium based on the formula below (based on the payout formula at expiry):

These formulae can therefore be used as a reference to calculate the percentage by which the price of the underlying asset needs to move before reaching the break-even price of a derivative warrant at expiry.

This seems unreasonable as the call warrant price should at least be equal to its intrinsic value, i.e. the excess of the prevailing market price of the underlying stock over the exercise price of the call warrant.

While in most cases a call warrant does trade above its intrinsic value, this does not mean that the intrinsic value must be the minimum value of a call warrant. As explained below, it is possible for a call warrant to trade below its intrinsic value.

Holding a call warrant differs from holding the underlying stock, especially since the holders of the call warrant are not entitled to receive any dividends that might be declared by the underlying stock. In this particular case, the underlying stock was due to announce its annual results in late March. Based on practices in previous years, the underlying stock is likely to go ex-dividend in mid-April. With an expiry date for the call warrant in late April, the market price of the underlying stock would be the ex-dividend price in determining the payout of the call warrant on that expiry date. This would result in a lower payout to call warrant holders than it otherwise should. Although the final dividend that the underlying stock would declare was still unknown in mid-March, it was widely anticipated that the dividend would be no less than $1.5. It was not unreasonable for potential investors and the liquidity provider to deduct the dividend element when pricing the call warrant. 

Delta is the ratio of the change in the derivative warrant price (after adjusted by the entitlement ratio) to the change in the underlying asset’s price.

Delta normally ranges between 0 and 1 for call warrants and 0 and -1 for put warrants (the negative sign shows the opposite directional movement to the underlying). In general, at-the-money call and put warrants have a delta of approximately 0.5 and -0.5 respectively. In-the-money derivative warrants will generally have a higher delta than out-of-the-money derivative warrants with the same underlying asset and maturity. For example, a call warrant with a delta of 0.1 is generally a deep out-of-the money derivative warrant, whereas a call warrant with a delta of 0.9 is generally a deep in-the-money derivative warrant. Vice versa, a put warrant with a delta of -0.1 is generally a deep out-of-the-money derivative warrant, whereas a put warrant with a delta of -0.9 is generally a deep in-the-money derivative warrant.

“Gearing” means the relationship that the cost of the underlying asset bears to the cost of a  derivative warrant. For example, if the gearing for a particular derivative warrant is 10 times, then the investment cost of that derivative warrant is 1/10 of the underlying asset.

However, in the case of a derivative warrant this only relates to the initial cost of the underlying asset and the initial cost of the derivative warrant. It cannot be used later to reflect the dynamic relationship between the price of the underlying asset and the price of the derivative warrant over time. “Effective gearing” of a derivative warrant is calculated by multiplying the gearing and the delta of the derivative warrant (adjusted with entitlement ratio).

Effective gearing is a better measure of the percentage change of a derivative warrant with a 1% change of underlying asset. For example, if the effective gearing is 10 times for a call warrant (and we assume other factors remain unchanged), when the price of the underlying asset rises by 1%, the theoretical price of the call warrant price should rise by 10%. Similarly, when the underlying asset falls by 1%, the theoretical price of the call warrant price should fall by 10%.

However, effective gearing should only be used as a reference as it will change over time given other factors, such as the underlying price, delta, gearing, time decay and implied volatility, also change.

A number of other factors affecting the price of the derivative warrant may also change over time and, therefore, a mere rise in the underlying asset’s price may not necessarily lead to a corresponding increase to the extent of the effective gearing, or to any increase at all in the derivative warrant’s price.

Implied volatility represents the anticipated level of volatility of underlying assets over the remaining life of a derivative warrant, as reflected in the price of the derivative warrant.

Implied volatility is one of the factors influencing the price of a derivative warrant. For example, assuming other factors remain constant, when implied volatility of a derivative Warrant decreases, its price should theoretically also go down, and vice versa. The movement of implied volatility will always cause a same directional movement in the price of a derivative warrant, and implied volatility is commonly used as a measurement to compare the expensiveness of a derivative warrant with products of similar terms.

Implied volatility is a key parameter in the issuer’s pricing formulae that cannot be observed directly. However, issuers can estimate the implied volatility based on:

(a)  the historical volatility of the underlying asset;

(b)  the implied volatility of the listed and OTC options based on market data; and

(c)  the issuer’s market expectation and cost of issuing the derivative warrant.

Implied volatility level of derivative warrants varies between issuers because each issuer may hold a different market expectation on a particular underlying asset from other issuers and has different issuing cost. 

Volatility is determined by annualised statistics measuring changes in price of its underlying asset: the greater the fluctuations, the higher the volatility.

“Historical volatility” is a measure of underlying price fluctuations over a certain period in the past. You may obtain information on historical volatility of the underlying asset by subscribing to the data provision service of a market data information provider.

Implied volatility of a derivative warrant has a close relationship with the implied volatility generated by OTC and listed options.

After an issuer sells a derivative warrant, it generally needs to hedge against the risks arising from that issuance through different channels: two of those channels are OTC options and listed options. OTC options are options that are traded on a bilateral basis outside of the trading facilities provided by any exchange. Usually, the counterparties are institutional professional investors, such as investment banks. Listed options are those traded on a trading facility such as the Exchange.

If the implied volatility of an OTC option or a listed option is moving downward, the implied volatility of a related derivative warrant may also move downward. On the contrary, if the implied volatility of an OTC option or a listed option is going upward, the implied volatility of the related derivative warrant may also go upward. Therefore, variations in the implied volatility of an OTC option or a listed option may indicate a trend in the implied volatility of related derivative warrant. 

OTC options are bilateral contracts traded privately between two participants, off-exchange. As a result, there is no public information available for the implied volatility of an OTC option.

You may obtain information on the implied volatility of a listed option by subscribing to the data provision service of a market data information provider.

When a listed company announces its financial results, it will also generally announce whether dividends will be paid.

Whether or not this affects the price of a related derivative warrant depends on whether or not dividends were expected and, if so, at what level and on what date. This is because the issuer considers past records of dividend distribution and the dividends expected by the market, when calculating the derivative warrant price.

If the dividend distribution and ex-dividend date are as expected and other factors remain constant, theoretically, the dividends should not affect the price of the derivative warrant.

Under normal circumstances, a derivative warrant linked to shares of a company will be adjusted if there is a capital adjustment of those underlying stocks (such as bonus issue, rights issue and restructuring event or spin-off / merger / consolidation). Specifically, an adjustment will be made to the entitlement ratio according to terms specified in the relevant listing documents.

In the case of a merger/consolidation, an adjustment will be made to the entitlement ratio of the derivative warrant of the company being merged or consolidated with. If the merger/consolidation results in an extinguishment of the current underlying, such underlying of the derivative warrant will change from the original underlying to a surviving/new underlying. Where there is a surviving company, no adjustment will be made to the derivative warrant of the surviving company.

Where the effective date of the adjustment occurs after the ex-entitlement date of the underlying stocks (such as in the case of spin-off), no adjustment will be made to those derivative warrants that expire in the interim period.

It is possible that trading of shares of the entities undergoing a merger may be suspended for a period of time. The Listing Rules require suspension of derivative warrants where the underlying stock is suspended. When this happens, the value of derivative warrants may be adversely affected due to time decay during the suspension period.

Under normal circumstances and for the purpose of calculating the value of the rights attached to the spin-off company, issuers will use volume-weighted average price (VWAP) of those auto-matched trades of that company on its first day of listing as the basis of adjustment. The adjustment will take effect from the day following the listing date. Investors should note that no adjustment will be made to those derivative warrants that expire before the effective date of the adjustment.

A call warrant is a short-term trading instrument with a gearing effect, it could magnify your loss relative to the underlying performance.

In addition to the underlying price, the liquidity provider’s quote also depends on a number of other factors.  Assuming all other factors remain constant, although the underlying price went back to HK$50 from HK$48, it is likely that the increase in the underlying price was offset or even outweighed by the decrease in the implied volatility of the call warrant, hence lowered the call warrant price.

The issue price of a call warrant is determined based on the market factors prevailing on the launch date of a warrant.  On the first trading day of the call warrant (being 3 trading days after the launch date), it is possible that substantial changes have occurred in respect of the market factors affecting the price of that call warrant.  

In addition to the terms of the call warrant (i.e. underlying, expiry date and strike price), its price also depends on a number of other factors which are based on different pricing assumptions adopted by individual issuers (e.g. different implied volatilities, interest rate, expected dividends, etc.).   Moreover, even with identical terms, different call warrants may have a different level of market participation and outstanding amount, which may affect the warrant price to a different extent.  Accordingly, the prices of call warrants with identical terms issued by different issuers may vary.

It is likely that the HK$0.01 last traded (nominal) price could have been brought down a while ago and does not reflect its prevailing theoretical value before the rally of the HSI, hence it is not the best reference to gauge the actual performance of the call warrant. 

It is particularly the case for a short term and deep out-of-the-money call warrant. Despite the HSI rallied more than 3%, the warrant is still out-of-the-money with short time to expiry, hence its prevailing theoretical value after the rally of the HSI is still below HK$0.01. 

The liquidity provider is not required to provide quote when the theoretical value of the warrant is less than HK$0.01.

HSI call warrants are not solely priced based on HSI index. They are mainly priced based on HSI index, interest rate and expected dividend. Since HSI futures contract reflects the value of HSI index, interest rate and expected dividend, the pricing of the HSI call warrants is generally priced based on HSI futures contracts.

Liquidity providers can provide bid and ask quotes at the pricing level they deem fair by reference to the theoretical price of the call warrant provided that they comply with the maximum spread requirements. The bid and ask spread may change from the time to time according to the prevailing market conditions affecting the underlying asset such as hedging costs and liquidity, spread and volatility of the relevant hedging vehicles.  Therefore it is possible that their quotes will not match your expected price levels due to the widening of the bid and ask spread.

The closing price of the call warrant and the underlying was as below.

This could happen because:

(a)  some other pricing factors affected the call warrant price (e.g. volatility, expected dividend, time decay, etc.);

(b)  the market closing time of the call warrant and the underlying security was different. Being an eligible security under the closing auction session, it continued to trade in the closing auction session which ended at 4:10 p.m. while the trading in the call warrant ceased at 4:00 p.m. In this case, due to the 10 minutes closing time gap, direct comparison of closing price of the call warrant and the underlying security might not be appropriate and meaningful, or

(c)  the closing price of the call warrant might not reflect the quote price of the liquidity provider. In this case, quotes of the liquidity provider might have moved in line with the underlying but were not reflected in the closing price of the call warrant.The closing price could be (1) calculated based on other exchange participants’ trades and quotes; or (2) carried forward from previous days.

The entitlement and exercise price of the call warrant will be adjusted according to the following formula:

Adjusted entitlement = Adjustment factor * E

Adjusted exercise price = X / Adjustment factor

Where

• Adjustment factor = 1 + N
• E:  Existing entitlement immediately prior to the bonus issue
• X:  Existing exercise price immediately prior to the bonus issue
• N:  Number of additional shares received by a holder of existing shares for each share held prior to the bonus issue

In this case,

• Adjustment factor = 1+ 1/10 = 1.1
• Adjusted entitlement = 1 * 1.1 = 1.1 shares
• Adjusted exercise price = HK$12.28/1.1 = HK$11.164 (rounded to the nearest HK$0.001)

The purpose of the adjustment is to ensure that as far as possible, the theoretical price of the call warrant remains unchanged immediately before and immediately after the adjustment. Assuming all factors being equal, the theoretical price of the call warrant will remain unchanged.

No, the expiry day of a derivative warrant is not the same as the last trading day. Investors can only trade a derivative warrant on or before the last trading day:

For a derivative warrant, there should be 3 settlement days between the last trading day and the expiry day. For example, if a warrant expires on Friday, 23 June, the last day of trading will be Monday, 19 June (assuming the 3 days between 19 and 23 June are settlement days).

All derivative warrants currently traded on the Exchange are European style and are cash settled at expiry.

For cash-settled derivative warrants that are in-the-money on the expiry date, the derivative warrant holders are then paid a positive cash settlement amount according to the terms and conditions as set out in the listing documents.

For derivative warrants issued on a single stock, 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 derivative warrants issued on a local index, 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 derivative warrants traded on the Hong Kong Futures Exchange on the second last business day of the contract month.

For more information about the settlement price at expiry for derivative warrants on other underlying assets, please refer to the relevant listing documents.

The issuer may elect to early terminate the derivative warrants. Holders of those derivative warrants may receive an early termination amount which is determined by the issuer:

(a)  in good faith and a commercially reasonable manner; and

(b)  where applicable, by reference to the determination made by the Exchange in relation to the relevant listed options or futures over the underlying stock. In a past case, such early termination amount has been calculated based on the difference between the exercise price and the offer price of cancelling the underlying stock under the proposed privatisation, adjusted by the entitlement ratio. However, such determination may be different on a case by-case basis.

(a)  Trading suspension or absence of closing price on:

i.  the 1st, 2nd, 3rd, or 4th valuation date only - in that case, the closing price on the next valuation date will be used as the closing price on such 1st, 2nd, 3rd, or 4th valuation date, so that there are 5 closing prices used to determine such 5-day average closing price.

ii. each of the 3rd and 4th valuation dates only - in that case, the closing price on the 5th valuation date will be used as the closing price on each of the 3rd and 4th valuation dates, so that there are 5 closing prices used to determine such 5-day average closing price.

(b)  Trading suspension or absence of closing price on the 5th valuation date only (but not the expiry date) - in that case, the closing price on the 5th valuation date is determined based on the issuer’s good faith estimate made in accordance with the terms and conditions. Such determination will be made on a case-by-case basis based on prevailing market conditions. The closing price on the expiry date was used in most of the past cases.

(c)  Trading suspension or absence of closing price on each of the 5 valuation dates and the expiry date - in that case, the closing prices on each of the 5 valuation dates are determined based on the issuer’s good faith estimate made in accordance with the terms and conditions. Such determination will be made on a case-by-case basis by reference to the prevailing market conditions. The last reported closing price was used in most of the past cases.

Trading suspension above means suspension of trading of the underlying stock during the last half hour before close of trading.

5-day average closing price: the average of the closing prices of the underlying stock quoted on each of the 5 business days falling immediately before the expiry date of a derivative warrant. This price is used to compare against the exercise price of a derivative warrant to determine the cash settlement amount at expiry.