Common use of Derivative Products Clause in Contracts

Derivative Products. 5.1 Uncollateralised derivative products are not asset backed. In the event of issuer bankrupted, the Client can lose his entire investment. The Client should read the listing documents to determine if a product is uncollateralised. 5.2 Derivative products such as derivative warrants and callable bull/bear contracts (CBBCs) are leveraged products and can change in value rapidly according to the gearing ratio relative to the underlying assets. The Client should be aware that the value of a derivative product may fall to zero resulting in a total loss of the initial investment. 5.3 Derivative products such as derivative warrants have an expiry date after which the derivatives may become worthless. The Client should be aware of the expiry time and choose a product with an appropriate duration to suit for their investment strategy. 5.4 The price of a derivative 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. 5.5 Clients trading derivative 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 Derivative product price. 5.6 HKEx requires all derivative 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, the Client may not be able to buy or sell the product until a new liquidity provider has been assigned. 5.7 If all conditions remain unchanged, the value of a derivative warrant will decay over time as its approaches its expiry date. Derivative warrants should therefore not be viewed as long term investments. Prices of derivative warrants can increase or decrease in line with the implied volatility of underlying asset price. 5.8 Clients trading CBBCs should be aware of their intraday “knockout” or mandatory call feature. CBBC will cease trading when the underlying asset value equals the mandatory call price/level as stated in the listing documents. The Client will only be entitled to the residual value of the terminated CBBC as calculated by the product issuer in accordance with the listing documents. The Client should also note that the residual value can be zero. Once the CBBC is called, even though the price of the underlying asset bounces back, such CBBC will not be listed in the market for trading and the Client will not be able to profit from the bounce-back. 5.9 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, the client will lose the funding costs for the entire lifespan of the CBBC. 5.10 Derivative Products are imbedded with options. Transactions in options carry a high degree of risk. The risk of loss in trading options can be substantial. The Client should have prior knowledge of, or experience in option markets. The Client should therefore carefully consider whether such trading is suitable in the light of his own financial position and investment objectives.

Derivative Products. 5.1 Uncollateralised derivative products are not asset backed. In the event of issuer bankrupted, the Client can lose his entire investment. The Client should read the listing documents to determine if a product is uncollateralised. 5.2 Derivative products such as derivative warrants and callable bull/bear contracts (CBBCs) are leveraged products and can change in value rapidly according to the gearing ratio relative to the underlying assets. The Client should be aware that the value of a derivative product may fall to zero resulting in a total loss of the initial investment. 5.3 Derivative products such as derivative warrants have an expiry date after which the derivatives may become worthless. The Client should be aware of the expiry time and choose a product with an appropriate duration to suit for their investment strategy. 5.4 The price of a derivative 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. 5.5 Clients trading derivative 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 Derivative product price. 5.6 HKEx requires all derivative 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, the Client may not be able to buy or sell the product until a new liquidity provider has been assigned. 5.7 If all conditions remain unchanged, the value of a derivative warrant will decay over time as its approaches its expiry date. Derivative warrants should therefore not be viewed as long term investments. Prices of derivative warrants can increase or decrease in line with the implied volatility of underlying asset price. 5.8 Clients trading CBBCs should be aware of their intraday “knockout” or mandatory call feature. CBBC will cease trading when the underlying asset value equals the mandatory call price/level as stated in the listing documents. The Client will only be entitled to the residual value of the terminated CBBC as calculated by the product issuer in accordance with the listing documents. The Client should also note that the residual value can be zero. Once the CBBC is called, even though the price of the underlying asset bounces back, such CBBC will not be listed in the market for trading and the Client will not be able to profit from the bounce-back. 5.9 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, the client Client will lose the funding costs for the entire lifespan of the CBBC. 5.10 Derivative Products are imbedded with options. Transactions in options carry a high degree of risk. The risk of loss in trading options can be substantial. The Client should have prior knowledge of, or experience in option markets. The Client should therefore carefully consider whether such trading is suitable in the light of his own financial position and investment objectives.