Gearing
Warrants cost only a fraction of the price of underlying assets. However, they can provide investors with greater exposure to underlying price movements as their prices generally rise and fall more steeply than underlying assets in percentage terms. This increased exposure can subsequently offer greater potential profit as a percentage of the capital invested.
Conversely warrants also expose investors to greater potential loss in percentage terms. However, you are never obliged to pay anything more than the initial price of the warrant, so the maximum amount you can lose is limited to the price paid.
Our hypothetical example in the pricing variables page illustrates the relative price movements of a call warrant and a put warrant against corresponding movements in the underlying price. In addition to seeking profits through exercising warrants on or before the expiry date, investors can potentially make profits by trading warrants.
Unlimited upside & limited downside
Although warrants can potentially multiply both gains and losses, investors can only ever lose the price of the warrant. Generally the cost of a warrant is significantly less than the price of the underlying.
Low transaction costs
Trading Warrants typically costs less than trading the underlying shares. Currently no stamp duty is payable on the purchase or sale of cash settled Warrants and brokerage and interest costs are reduced because the price of Warrants is usually less than the underlying price.
Ease of trade
Warrants are traded on the SEHK AMS3 system. The AMS3 system provides market transparency which allows stockbrokers to execute all trades quickly and effectively.
Insurance
Warrants can be used as a form of insurance to protect an existing underlying portfolio against a falling market. An investor with a holding in a particular underlying who was nervous about the future direction the market could purchase put warrants instead of selling underlying assets. This would allow the investor to retain share ownership without realising capital gains and without having full exposure to the downside risks.
Warrants can be used to hedge against future price increases. An investor interested in purchasing shares who did not have immediate access to funds could purchase call warrants to capture the benefits of an anticipated price rise. This would allow the investor to establish a price (the exercise price) at which to purchase the shares in the future.
Releasing Share Capital
Call Warrants can also be used to free up capital invested in undelrying assets. An investor may sell existing underlying holdings and purchase a corresponding number of Call Warrants for a fraction of the price. The investor has maintained exposure to underlying price rises while releasing capital from the security holding.
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