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REUTERS 3000 XTRA
University of Hong KongUniversity of Hong Kong
Trading WorkshopTrading Workshop
David Lo
Class 11Class 11
Equity Workshop IIIEquity Workshop III
Equities DerivativesEquities Derivatives
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Agenda
• Option Basics
• Equity-linked Notes
• Warrants
• Guarantee Notes
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Option Basics
• Call & Put Options
Volatility
Maturity
Spot
Interest Rate
Strike Price
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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
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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%
Short a asset Put option struck at strike price
Premium received is packaged as extra yield
= +
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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: ABC Investment Underlying Stock: HSBC Holdings plc <0005.HK> Underlying Price: HK$85Put Strike Price: 90% of Spot, or $77.18Trade Price: 99.05%Trade Date: 10-Oct-02Settlement Date: 24-Oct-02Valuation Date: 12-Nov-02Maturity Date: 14-Nov-02Denomination: HK$100,000Shares per Note: 1296 ( subject to adjustment)
ELN Calculator.xls
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ELN Calculator
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ELN Calculator
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Warrants in HK
• How to find the best warrants for your clients?
• Based on their requirements :
• - Top 5 turnover
• - Maturity < Jun 2005
• - Cheaper (Implied Volatlity)
• - Call
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Example of 0941.HK (China Mobile) - 0941W.HK (F3)
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Agenda
• HKEx traded warrants: Equity and Derivative warrants
• How to search Quotes & News for Warrants
• Interpretation of Volatility, Implied Volatility, Delta, Gearing and e-Gearing
• Features and Benefits of the Hong Kong Warrants Model under Reuters 3000 Xtra
• How to download Warrants Data into Excel (PPP)
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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 ModelStock 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
• The main features of a capital guarantee note is
- Principal protection (capital guarantee), and
- Participation of equity market performance
• Linked to
- Single stock
- Basket of stocks
- Stock market index, sub-index
- Basket of stock market indexes
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Guaranteed Notes Calculator
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