REUTERS 3000 XTRA University of Hong Kong Trading Workshop David Lo Class 11 Equity Workshop III Equities Derivatives

REUTERS 3000 XTRA Agenda Option Basics Equity-linked Notes Warrants Guarantee Notes

REUTERS 3000 XTRA Option Basics Call & Put Options Volatility Maturity Spot Interest Rate Strike Price

REUTERS 3000 XTRA Option Basics Option Volatility (EquityOptionCalculator) -Rate of change in the underlying and the magnitude of these changes  Historical Volatility  Implied Volatility

REUTERS 3000 XTRA Simple Option Strategies Examples of option strategies  Covered Call, Spread, Straddle, Strangle. Option Strategies using EquityOptionList.xls and EquityOptionStrategy.xls

REUTERS 3000 XTRA Equity Option List Model

REUTERS 3000 XTRA 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 =+

REUTERS 3000 XTRA 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

REUTERS 3000 XTRA 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?

REUTERS 3000 XTRA Example of ELN Issuer:ABC Investment Underlying Stock:HSBC Holdings plc Underlying Price:HK$85 Put Strike Price:90% of Spot, or $77.18 Trade Price:99.05% Trade Date:10-Oct-02 Settlement Date:24-Oct-02 Valuation Date:12-Nov-02 Maturity Date:14-Nov-02 Denomination:HK$100,000 Shares per Note:1296 ( subject to adjustment) ELN Calculator.xls

REUTERS 3000 XTRA ELN Calculator

REUTERS 3000 XTRA ELN Calculator

REUTERS 3000 XTRA Warrants in HK How to find the best warrants for your clients? Based on their requirements : - Top 5 turnover - Maturity < Jun Cheaper (Implied Volatlity) - Call

REUTERS 3000 XTRA Example of 0941.HK (China Mobile) W.HK (F3)

REUTERS 3000 XTRA 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)

REUTERS 3000 XTRA 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

REUTERS 3000 XTRA 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.

REUTERS 3000 XTRA 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.

REUTERS 3000 XTRA 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

REUTERS 3000 XTRA 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.

REUTERS 3000 XTRA Hong Kong Warrants Model Stock Overview A quick overview of the stock market and performances

REUTERS 3000 XTRA 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.

REUTERS 3000 XTRA Derivative Warrants (I) (Code: 0005.HK)

REUTERS 3000 XTRA 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

REUTERS 3000 XTRA Guaranteed Notes Calculator

REUTERS 3000 XTRA Q & A