Product Features

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 but not limited to stocks, exchanged traded funds, 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.