What are the risks I need to consider before investing in a warrant or CBBC?

Investing in structured products is not for everyone.

Warrants and CBBCs involve a high degree of risk and you must be comfortable with that risk before investing. The relevant listing documents disclose the key risks applicable to the relevant warrant or CBBC. You must consider and understand those risks. You must also be able to assume the risks, which includes being financially able to bear the potential losses in a “worst case” scenario.

Generally speaking, the key risks include the following:

(a) Non-collateralisation - Warrants and CBBCs are not secured by any asset of the issuer or the guarantor (if any) or supported by any other collateral.

(b) Credit risk - Holders of warrants and CBBCs are unsecured creditors of the issuer and the guarantor (if any) and they have no preferential claim to any assets that an issuer or a guarantor (if any) may hold. You can access information about issuers’ credit ratings on the HKEX’s website: 

https://www.hkex.com.hk/products/securities/derivative-warrants/derivative-warrant-issuer-and-liquidity-provider-information/issuers-credit-rating?sc_lang=en

(c) Gearing risk - Although warrants and CBBCs often cost less than the underlying assets, a warrant or CBBC may change in value to a much greater extent than the underlying assets. Although the potential return on warrants or CBBCs may be higher than that on the underlying assets, in the worst case the value of warrants or CBBCs may fall to zero and holders may lose their entire investment amount.

(d) Limited life - Unlike stocks, warrants and CBBCs have an expiry date and therefore a limited life. Unless the warrants or CBBCs are in-the-money, they become worthless when they expire.

(e) Time decay - So long as other factors remain unchanged, the time value of warrants or funding costs of CBBCs will decrease over time and will become zero upon maturity. Therefore, without a strong view of the underlying assets, warrants or CBBCs should be viewed as a relatively short term investment product in comparison with an investment in the underlying assets.

(f) Market forces - In addition to the basic factors that determine the theoretical price of a warrant or CBBC, prices of warrants or CBBCs are also affected by the demand for and supply of the warrants or CBBCs. This is particularly the case when warrants or CBBCs of a series are almost sold out and when there are further issues of a series of warrant or CBBC.

(g) Turnover ‐ High turnover should not be regarded as an indication that the price of a warrant or CBBC will go up. The price of a warrant or CBBC is affected by a number of factors in addition to market forces, such as the price of the underlying assets and their volatility, the time remaining to expiry, interest rates and the expected dividend on the underlying assets.

(h) Possibly limited secondary market - The liquidity provider may be the only market participant for a particular warrant or CBBC. The more limited the secondary market, the more difficult it may be for you to realise the value in the warrant or CBBC before expiry.

(i) Operational and technical problems affecting liquidity services – The liquidity provider may not be able to provide liquidity when there are operational and technical problems hindering its ability to do so. Even if the liquidity provider is able to provide liquidity in such circumstances, its performance on liquidity provision may be adversely affected. For example:

i. the spread between bid and ask prices quoted may be significantly wider than its normal standard;

ii. the quantity for which liquidity will be provided by the liquidity provider may be significantly smaller than its normal standard; and

iii. the liquidity provider’s response time for a quote may be significantly longer than its normal standard.

(j) Corporate action of the underlying stocks – Corporate actions affect the value of the underlying stocks which in turn affect the value of the warrants or CBBCs. Adjustments may or may not be made to the terms of the warrants or CBBCs (such as entitlement ratio, exercise price, etc.) depending on the terms and conditions set out in the listing documents. Where adjustments are to be made, the adjustments will only become effective (the “Effective Date”) when all necessary parameters can be determined.

The prices of the warrants or CBBCs may be volatile from the ex-entitlement date of the underlying stocks until the Effective Date. You should exercise particular caution in trading those warrants and CBBCs during that period. In addition, no adjustment will be made to those warrants and CBBCs that expire within that period.

You should read carefully the risk disclosure in the relevant listing documents of the warrant or CBBC before investing in such product.