I hold a call warrant with an exercise price of HK$12.28 and the entitlement is 1 share. The underlying company announced a bonus issue of one bonus share for every ten existing shares. How does the bonus issue affect the price and the terms of the call warrant?

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 warrants remain unchanged immediately before and immediately after the adjustment. Assuming all factors being equal, the theoretical price of the warrants will remain unchanged.