2. What are the major risks of warrants and CBBCs?

Warrants CBBCs
Similarities
  • The gearing effect can lead to a greater loss than holding underlying assets
  • Credit risk of the issuer
Differences
  • Implied Volatility could be a difficult concept for some investors to understand
  • Time decay
  • For warrants that are deep in-the-money or out-of-the-money, the liquidity of such products may be unstable (i.e. larger movement of Implied Volatility, smaller quote size or wider bid-ask spread)
  • Mandatory Call Event (“MCE”)
  • When the underlying asset's price is close to the Call Price, the price of a CBBC may become more volatile with wider spreads and unstable liquid
Warrants
  • Warrants are a special form of options. Investors can only take a long (buy) position in warrants.
  • Warrants are an instrument that gives investors the right (but not the obligation) to buy or sell the underlying asset at a pre-set price (i.e. "strike price") on or before the expiry date.
  • Generally, warrants issued in Hong Kong have a life span of six months to two years, however investors don't usually hold to maturity.
CBBCs
  • CBBCs are leveraged instruments that track the performance of the underlying assets, A CBBC is an instrument that tracks the performance of an underlying asset. The trading price of a CBBC tends to mirror the movement in the price of its underlying asset.
  • CBBCs have a mandatory call feature. If the current price of the underlying assets is at or below (for bull contracts), or at or above (for bear contracts) the call price or level, a mandatory call event ("MCE") will be triggered, where the trading of the CBBC will be terminated immediately and the CBBC will automatically expire early.
Bullish Outlook Bearish Outlook
Warrants Call warrants Put warrants
CBBCs Bull contracts Bear contracts

*Turnover of a warrant or CBBC has no direct relationship with the product's price. Investors should not use turnover as the only indicator when choosing a warrant or CBBC.