Derivatives, structured products and warrants
What this domain tests
This domain checks product mechanics and risk identification: futures and options, listed derivative warrants, callable bull/bear contracts (CBBCs) and retail structured products, plus the selling obligations attached to them.
Core rules and concepts
- Exchange-traded futures and options are margined and marked to market daily through the clearing house, which manages counterparty risk.
- Listed derivative warrants are issued by third parties, not the underlying company or the exchange. The investor carries issuer credit risk, plus time decay, implied volatility risk and liquidity risk from the issuer's market making.
- CBBCs contain a mandatory call feature: when the underlying touches the call price, the contract terminates and the investor may receive a residual value, which can be zero.
- Retail structured products need SFC authorisation before public offer; selling them requires a risk disclosure statement, an assessment of the client's derivative knowledge and, for complex products, a suitability assessment even without solicitation.
- Gearing tells you leverage; premium tells you how far the underlying must move for break-even at expiry. They are different measures.
Worked example
A warrant costs HK$0.25, the entitlement is 10 warrants per share, and the share trades at HK$100. Cost of controlling one share = 10 × 0.25 = HK$2.50, so gearing = 100 / 2.50 = 40x. If delta is 0.5, effective gearing is 40 × 0.5 = 20x: a 1% share move implies roughly a 20% warrant move.
Traps that cost marks
Believing exchange listing removes issuer risk; confusing gearing with premium; ignoring that a CBBC can be called intraday; and selling a structured product on the assumption that a signed risk disclosure replaces the suitability obligation.