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A warrant is an instrument that gives the holder a right – but not the obligation - to “buy” or “sell” an underlying asset at a pre-set price (called the “exercise price”) on or before the expiry date. Warrants can be issued over a range of assets, including stocks, stock indices, currencies and commodities or a basket of assets. It does not give you any rights in or to the underlying asset.
There are two types of warrants:
(a) A “call” warrant may be invested in by an investor who believes that the price of the underlying asset will increase during the term of the warrant.
(b) A “put” warrant may be invested in by an investor who believes that the price of the underlying asset will decrease during the term of the warrant.
Typically, warrants in Hong Kong are issued with a life span of six months to two years, but are usually traded by investors before they expire. Warrants magnify your investment through leverage. This carries significant opportunities as well as significant risks. Warrants usually cost a fraction of the price of the underlying asset and may provide a leveraged return, but such leverage could also magnify your losses.
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