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Non-collateralized Nature of Structured Products

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Inline Warrant

Inline warrants are the latest structured product introduces by the HKEx and issuers since CBBC. Just like warrants and CBBC, investors only need a security trading account in Hong Kong to trade Inline Warrants.

Characteristic of Inline Warrant is very much different from Warrant or CBBC. Traditionally investors have a directional outlook on an underlying asset and use warrant or CBBC as investment products. Inline Warrants investors hope for the underlying price to be within a specified range at maturity. During Valuation before Maturity, if the Underlying Price is within the Upper Strike and Lower Strike which were fixed at issuance, investor can receive a In-the-Range Settlement Price of HKD 1.00. On the other hand, if the Underlying Price during valuation is outside of the Upper Strike and Lower Strike which were fixed at issuance, investor can receive a Out-of-The-Range Settlement Price of HKD 0.25

Characteristic of Inline Warrants:

  • Has an Upper Limit and a Lower Limit
  • Time Factor, if the Underlying asset price is within the Upper Strike and Lower Strike, the price of the Inline warrant will increase toward the higher settlement price of HKD 1.0 over time. On the other hand, if the Underlying Price is outside the Upper and Lower strike, then the fair value of Inline Warrant will approach the Minimum settlement price of HKD 0.25 as each trading days go by
  • Underlying price factor, if the Underlying Asset price moves from outside the Upper and Lower Strikes to inside the range, the value of the Inline Warrants should increase. On the other hand, if the Underlying Asset price moves from inside the Upper and Lower Strikes to outside the Range, the value of the Inline Warrants should decrease.
  • When an inline warrant is in-the-range at expiry, the amount payable per warrant is HK$1. When an inline warrant is out-of-the-range at expiry, the amount payable per warrant is HK$0.25. Thus, price of inline warrant would be between HK$1.00 – HK$0.25

Example:

Inline Warrant 4XXXX
Underlying: HSI
Maturity: 2019/6/27 (HSI Futures Expiry)
Upper Strike: 27,000
Lower Strike: 24,000
HSI Spot level: 25,767
Inline Warrant 4XXXX nominal price: HKD 0.49
Cost to buy 1 lot (10,000) inline warrant HKD 4,900


If on 27 June 2019, HSI futures settlement price (EAS) is:

Scenario Outside (and not equal to) the Upper Strike and the Lower Strike Inside(or equal to) the Upper Strike and the Lower Strike
Inline Warrant Settlement Price HKD 0.25 HKD 1.00
Cost of 1 lot @ HKD 0.49 HKD 4,900 HKD 4,900
Receive at maturity for 1 lot HKD 2,500 HKD 10,000
Profit / Lost (%) -49% +104%
Inline warrant is newly introduced to the market and there is no similar products currently listed on the Exchange for comparison
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