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University of Hong Kong University of Hong Kong

Trading WorkshopTrading Workshop

David Lo

Class 11Class 11Equ ity Workshop III Equ ity Workshop III

Equ ities DerivativesEqu ities Derivatives

8/3/2019 Class 11-Equity Workshop III - Equities Derivatives

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Agenda

Option Bas ics

Equity- linked Note s

Warra nts

Gu ara ntee Note s

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Option Basics

Call & P ut Option s

VolatilityMaturity

Spot

Interest RateStrikePrice

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Option Basics

Option Vola tility (EquityOption Cal cu la tor )

-Ra te of ch a nge in the unde rlying a nd the ma gnitude of the s e ch a nge s

H is tor ical Vola tility

Implied Vola tility

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Simple Option Strategies

Ex am ple s of option s tra tegie s

Cove r ed Call, S pr e a d, S tra dd le , S tra ng le.

Option S tra tegie s us ing EquityOptionLi s t.xls a nd EquityOption S tra tegy.x ls

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Equity Option List Model

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Equity-linked notes (ELN)

ELN is a co mb ina tion of a s ho r t or m ediu m note with a n option po s ition

- Yie ld enh a nce ment

- Note/depo s it + s ho r t option (s)

- Bull ELN, B e ar ELN, S tra ng le ELN

Bull ELN is the mos t popu lar type , ove r 90% ELN tra de s ar e Bull ELN

ELN

U SD 10,000

Yield: 24%

Time Deposit

USD 10,000

Yield: 2%

Short a asset Put optionstruck at strike price

Premium received is packaged as extra yield

= +

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ELN

Inve s tor ca n choo s e a s tock he/ s he is w illing to a cqui r e a t a pr ice lowe r tha n cu rr ent mar ket leve l =>P ut S tr ike Pr ice

Us ually s et a t 5 to 10% b e low cu rr ent pr ice

Then the inve s tor ca n choo s e a ma tur ity

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Fair Yield of an ELN

H ow ca n we kno w whethe r a n ELN is giving a f a ir yie ld? Or the par ticipa tion ra te is f a ir for a ca pital gu ara ntee note?

The a nsw e r lies on the pr ice of the option:

- Ar e we getting f a ir pr ice for s e lling option (s) or pa ying f a ir pr ice for b uying option (s) ?

- Whethe r a n option is f a irly pr iced or not ca n be judged f r om the implied vo la tility of the option?

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Example of ELN

Issuer: ABC Investment Underlying Stock: HSBC Holdings plc <0005.HK>Underlying Price: HK$85 Put Strike Price: 90% of Spot, or $77.18Trade Price: 99.05%Trade Date: 10-Oct-02

Settlement Date: 24-Oct-02Valuation Date: 12-Nov-02 Maturity Date: 14-Nov-02 Denomination: HK$100,000Shares per Note: 1296 ( subject to adjustment)

ELN Cal cu la tor .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 tr aded wa rr an ts: Equity and Deriv a tiv e wa rr an ts

How to s ea rch Quot es & N ews for W a rr an ts

In terpr eta tio n of Vol a tility, Impli ed Vol a tility, D elta ,

G ea ri ng and e-G ea ri ngFea tur es and Bene fits of th e Ho ng Ko ng W a rr an ts Mo de lunde r R eut ers 3000 Xtr a

How to dow n load W a rr an ts D a ta in to Exc el (PPP)

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Types of Warrants

W arrants are listed on the Stock Exchange of Hong Kong, and Hong KongExchanges 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

G ive their holders the right to subscribe for equity securities of an issuer at a predetermined price.

A re issued by that issuer or any of its subsidiaries.

Can be either A merican or European style.M ust 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 warrantholder.

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Derivative Warrants

F all under the category of derivative investment instruments.

Have a minimum life of six months from the date of issue or grantand a maximum life of five years (normally from six months totwo years.

The underlying assets of derivative warrants can be ordinaryshares, market indices, foreign currencies, commodities or a

basket of shares. The issuer of derivative warrants may not be theissuer of the underlying assets, but should hold or have a right tohold the underlying assets.A re issued by a third party, generally an investment bank,independent of the issuer of the underlying assets and itssubsidiaries.

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Exercising Derivative Warrants

I nvestors may receive the underlying assets or an equivalentamount of cash.

The issue and exercise of derivative warrants has no effect on thequantity 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

A llows you to have an easy navigation through the variousdisplay of the warrants and their instruments.

Has a general overview of the index constituents and the rankingstatistics of the stocks and their warrants

A nalyses the stock and its constituent warrants.

V iews the relative performance of a warrant against itsunderlying 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

I t narrows to the warrants data, with the Sub-heading of Top ± V olume, Net G ainers, Net Losers,% G ainers, % Losers, Top V alue, M arket Digest and A ll W arrants.

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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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Q & A

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