LI, Tao @ Hong Kong

Trading in derivative warrants has outweighed that of callable bull/bear contracts (CBBC) in Hong Kong so far this year, a reverse from 2009, as the low implied volatility amid a sluggish stock market makes warrants more attractive, according to Victor Chan, Manager of Listed Products Sales and Marketing at HSBC Global Markets.

Both warrants and CBBCs are a type of structured product that tracks the performance of an underlying financial asset without requiring investors to pay the full price required to own the actual asset, allowing investors to take bullish or bearish positions on the underlying asset. CBBCs can be called by the issuer when the price of the underlying asset reaches a preset level, the key difference between CBBCs and warrants.

According to a report compiled by HSBC and provided to China Daily, the average daily turnover in warrants as of end-June increased to HK$9.33 billion, up 37 percent from the daily average of HK$6.8 billion in 2009. In sharp contrast, daily turnover in CBBCs averaged only HK$4.8 billion, down 31.4 percent from HK$7.0 billion last year.

Total warrant trading represents 14.7 percent of total market turnover so far this year, compared with the 10.8 percent market ratio in 2009. CBBC turnover, by contrast, accounts for only 7 percent of the total market turnover in the same period, down significantly from last year’s 11 percent market share.

“The relatively cheaper warrant resulting from a lower implied volatility made it more attractive compared with CBBCs,” Chan said.

Chan said the highs and lows of implied volatility, which reflects the market expectation, stand for the anticipated fluctuation margins of a stock market rather than its good or bad performance.

Examples can be seen from the city’s benchmark Hang Seng Index, which soared 52 percent in 2009 and dropped 5 percent this year, while the implied volatility has generally remained low over the period.

“It means the market expects that the correction in the Hang Seng Index will continue to be smooth, rather than a steep one,” said Chan.

The total daily turnover of warrants and CBBCs averaged approximately HK$14.7 billion as of end-June, an increase of 6.5 percent over 2009.

If market sentiment improves in the second half of this year, the bank believes the total turnover of warrants and CBBCs this year will increase by 5 to 10 per cent compared to 2009.

Chan said the fact that the market share of warrants has increased this year while the amount of net fund inflow declined suggests that investors tend to take a short-term investment view.

The bull-to-bear turnover ratio so far remains at 45 to 55, a similar level to that in 2009, which suggests that investors continue to prefer bear contracts over bull contracts, said the HSBC report.

There are currently some 4,000 warrants and 1,000 CBBCs listed in the local bourse.

China Daily

(HK Edition 07/20/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-07/20/content_11021374.htm