Risks of Structured Products Disclosure Statement
1. Issuer Default Risk
In the event that a structured product issuer becomes insolvent and defaults on their listed securities, investors will be considered as unsecured creditors and will have no preferential claims to any assets held by the issuer. Investors should therefore pay close attention to the financial strength and credit worthiness of structured product issuers.
Note: “Issuers Credit Rating” showing the credit ratings of individual issuers is now available under the Issuer and Liquidity Provider Information sub-section under Derivative Warrants and under CBBCs section on the HKEX corporate website.
2. Uncollateralized Product Risk
Uncollateralized structured products are not asset backed. In the event of issuer bankruptcy, investors can lose their entire investment. Investors should read the listing documents to determine if a product is uncollateralized.
3. Gearing Risk
Structured products such as derivative warrants and callable bull/bear contracts (CBBCs) are leveraged and can change in value rapidly according to the gearing ratio relative to the underlying assets. Investors should be aware that the value of a structured product may fall to zero resulting in a total loss of the initial investment.
4. Expiry considerations
Structured products have an expiry date after which the issue may become worthless. Investors should be aware of the expiry time horizon and choose a product with an appropriate lifespan for their trading strategy.
5. Extraordinary price movements
The price of a structured product may not match its theoretical price due to outside influences such as market supply and demand factors. As a result, actual traded prices can be higher or lower than the theoretical price.
6. Foreign exchange risk
Investors trading structured products with underlying assets not denominated in Hong Kong dollars are also exposed to exchange rate risk. Currency rate fluctuations can adversely affect the underlying asset value, also affecting the structured product price.
7. Liquidity Risk
The Exchange requires all structured product issuers to appoint a liquidity provider for each individual issue. The role of liquidity providers is to provide two way quotes to facilitate trading of their products. In the event that a liquidity provider defaults or ceases to fulfill its role, investors may not be able to buy or sell the product until a new liquidity provider has been assigned.
Some Additional Risks Involved in Trading Derivative Warrant
1.Time Decay Risk
All things being equal, the value of a derivative warrant will decay over time as it approaches its expiry date. Derivative warrants should therefore not be viewed as long term investments.
2. Volatility Risk
Prices of derivative warrants can increase or decrease in line with the implied volatility of underlying asset price. Investors should be aware of the underlying asset volatility.
Some Additional Risks Involved in Trading CBBCs
1.Mandatory Call Risk
Investors trading CBBCs should be aware of their intraday “knockout” or mandatory call feature. A CBBC will cease trading when the underlying asset value equals the mandatory call price/level as stated in the listing documents. Investors will only be entitled to the residual value of the terminated CBBC as calculated by the product issuer in accordance with the listing documents. Investors should also note that the residual value can be zero.
2. Funding Costs
The issue price of a CBBC includes funding costs. Funding costs are gradually reduced over time as the CBBC moves towards expiry. The longer the duration of the CBBC, the higher the total funding costs. In the event that a CBBC is called, investors will lose the funding costs for the entire lifespan of the CBBC. The formula for calculating the funding costs are stated in the listing documents.
All opinions, news, analysis, prices or other information contained in the Solomon JFZ websites and APP are provided as general market commentary and does not constitute investment advice, nor a solicitation or recommendation for you to buy or sell any securities, futures, options or other financial instruments.
For more information on derivative warrants and CBBCs, please visit the HKEX corporate website:
Derivative Warrants, Products Section (http://www.hkex.com.hk/Products/Securities/Derivative-Warrants?sc_lang=en)
Callable Bull/Bear Contracts, Products Section
There are some more educational video clips about Stock Options are available at HKEX corporate website (https://www.hkex.com.hk/Products/Listed-Derivatives/Single-Stock/Stock-Options/Options- Education/Online-Courses-Podcast-Channel?sc_lang=en ).
You are encouraged to understand all Structured Products related risks before trading.