Product Information
Inline warrants are sophisticated structured products, and there are no similar products listed on the Stock Exchange of Hong Kong for comparison. Investors can obtain a pre-determined fixed payoff, either $1 or $0.25, at maturity, and so the maximum possible profit is capped by a fixed amount.
The main features of an inline warrant include the expiry date, the lower strike price, and the upper strike price.
On expiry date:
If the settlement price of the underlying asset is between the upper and lower strike prices, the cash settlement amount of the inline warrant = $1.
If the settlement price of the underlying asset is outside the upper and lower strike price range, the cash settlement amount of the inline warrant = $0.25.
For example, consider an inline warrant underlying Tencent Holdings (700) with a lower strike price of $300, an upper strike price of $400, and remaining tenor of 100 days from now. On the expiry date, if the average of the previous 5 closing prices (“the underlying settlement price”) is $320 or $380 (within-boundary), the investors will receive $1 in cash per inline warrant. If the underlying settlement price of Tencent is $280 or $420 (out-of-boundary), the investors will only receive $0.25 in cash per inline warrant.
Before expiry date:
The issuer will provide quotes and liquidity for inline warrants, and the prices of inline warrants are mainly affected by the following factors:
| Current price of underlying asset | Within-boundary | Out-of-boundary | ||
| Near lower strike price | Near upper strike price | Below lower strike price | Above upper strike price | |
| Underlying asset price ↑ | ↑ | ↓ | ↑ | ↓ |
| Implied volatility ↑ | ↓ | ↑ | ||
| Expiry date ↓ | ↑ | ↓ | ||
Differences between inline warrants and standard warrants/CBBCs:
| Inline Warrants | Standard Warrants | CBBCs | |
| Mandatory call | No | No | Yes |
| Impact of implied volatility on prices | Yes | Yes | Insignificant |
| Time value | Varies depending on the current underlying price, lower strike, and upper strike | Drops faster near the expiry date | Insignificant |
| Settlement calculation | Single stock inline warrants: the average of the 5 closing prices of the underlying stock immediately preceding the expiry date | Single stock warrants: the average of the 5 closing prices of the underlying stock immediately preceding the expiry date | Single stock CBBCs: the closing price of the underlying stock 1 trading day before the expiry date |
| Index Inline Warrants/Standard Warrants/CBBCs: the average of quotations taken at 5-minute intervals on the expiry date of the spot month index futures (EAS) | |||
