David Lo REUTERS 3000 XTRA

University of Hong Kong Trading Workshop

Class 11

Equity Workshop III Equities Derivatives

Agenda

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Option Basics

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Equity-linked Notes

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Warrants

•

Guarantee Notes

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Option Basics

• Call & Put Options

Spot Maturity Strike Price Interest Rate

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Volatility

Option Basics

• Option Volatility ( EquityOptionCalculator ) -Rate of change in the underlying and the magnitude of these changes  Historical Volatility  Implied Volatility

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Simple Option Strategies

• Examples of option strategies  Covered Call, Spread, Straddle, Strangle.

• Option Strategies using EquityOptionList.xls

and EquityOptionStrategy.xls

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Equity Option List Model REUTERS 3000 XTRA

Equity-linked notes (ELN)

• • ELN is a combination of a short or medium note with an option position Yield enhancement Note/deposit + short option(s) Bull ELN, Bear ELN, Strangle ELN Bull ELN is the most popular type, over 90% ELN trades are Bull ELN

ELN

USD 10,000 Yield: 24%

=

Time Deposit USD 10,000 Yield: 2%

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+

Short

a asset

Put

option struck at strike price Premium received is packaged as extra yield

ELN

• Investor can choose a stock he/she is willing to acquire at a price lower than current market level => Put Strike Price • Usually set at 5 to 10% below current price • Then the investor can choose a maturity

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Fair Yield of an ELN

• How can we know whether an ELN is giving a fair yield? Or the participation rate is fair for a capital guarantee note?

• The answer lies on the price of the option: Are we getting fair price for selling option(s) or paying fair price for buying option(s)?

Whether an option is fairly priced or not can be judged from the implied volatility of the option?

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Example of ELN

Issuer: Underlying Stock: Underlying Price: Put Strike Price: Trade Price: Trade Date: Settlement Date: Valuation Date: Maturity Date: Denomination: Shares per Note: ABC Investment HSBC Holdings plc <0005.HK> HK$85 90% of Spot, or $77.18

99.05% 10-Oct-02 24-Oct-02 12-Nov-02 14-Nov-02 HK$100,000 1296 ( subject to adjustment)

ELN Calculator.xls

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ELN Calculator REUTERS 3000 XTRA

ELN Calculator REUTERS 3000 XTRA

Warrants in HK

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How to find the best warrants for your clients?

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Based on their requirements :

• • • •

- Top 5 turnover - Maturity < Jun 2005 - Cheaper (Implied Volatlity) - Call REUTERS 3000 XTRA

Example of 0941.HK (China Mobile) - 0941W.HK (F3) REUTERS 3000 XTRA

Agenda

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HKEx traded warrants: Equity and Derivative warrants

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How to search Quotes & News for Warrants

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Interpretation of Volatility, Implied Volatility, Delta, Gearing and e-Gearing

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Features and Benefits of the Hong Kong Warrants Model under Reuters 3000 Xtra

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How to download Warrants Data into Excel (PPP) REUTERS 3000 XTRA

Types of Warrants

• Warrants are listed on the Stock Exchange of Hong Kong, and Hong Kong Exchanges and Clearing Limited (HKEx).

• Two kinds of warrants: equity and derivative warrants • http://www.hkex.com.hk/invedu/booklet/dwflyer.pdf

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Equity Warrants

• Give their holders the right to subscribe for equity securities of an issuer at a predetermined price.

• Are issued by that issuer or any of its subsidiaries. • Can be either American or European style. • Must have a minimum life from one year and up to maximum of five years from the date of issue or grant.

• The issuer of the warrants is obliged to deliver the underlying securities upon full payment of the exercise price by the warrant holder.

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Derivative Warrants

• • • • Fall under the category of derivative investment instruments. Have a minimum life of six months from the date of issue or grant and a maximum life of five years (normally from six months to two years.

The underlying assets of derivative warrants can be ordinary shares, market indices, foreign currencies, commodities or a basket of shares. The issuer of derivative warrants may not be the issuer of the underlying assets, but should hold or have a right to hold the underlying assets. Are issued by a third party, generally an investment bank, independent of the issuer of the underlying assets and its subsidiaries.

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Exercising Derivative Warrants

• Investors may receive the underlying assets or an equivalent amount of cash.

• The issue and exercise of derivative warrants has no effect on the quantity of the underlying assets (such as ordinary shares). • They provide the market with instruments which may be used for hedging or investment purposes

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Hong Kong Warrants Model

• Allows you to have an easy navigation through the various display of the warrants and their instruments.

• Has a general overview of the index constituents and the ranking statistics of the stocks and their warrants • Analyses the stock and its constituent warrants. • Views the relative performance of a warrant against its underlying and to analyze them technically • Tracks a list of ten stocks based on the total trading volume of their warrants on a real time basis.

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Hong Kong Warrants Model Stock Overview

A quick overview of the stock market and performances

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Hong Kong Warrants Overview

• It narrows to the warrants data, with the Sub-heading of Top – Volume, Net Gainers, Net Losers, % Gainers, % Losers, Top Value, Market Digest and All Warrants.

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Derivative Warrants (I) (Code: 0005.HK)

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Guaranteed Notes

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The main features of a capital guarantee note is

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Principal protection (capital guarantee), and Participation of equity market performance

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Linked to

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Single stock

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Basket of stocks

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Stock market index, sub-index Basket of stock market indexes REUTERS 3000 XTRA

Guaranteed Notes Calculator REUTERS 3000 XTRA

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