How do warrants work?

This depends on the type of warrant you buy (call versus put). The following examples deal with a 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-ofthe-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-ofthe-money”, respectively, and will become worthless.