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 Derivatives |
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What is a HYN |
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1. |
What is a High-Yield Note
(HYN)? |
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A HYN
is a hybrid investment consisting of two major components.
It is a debt instrument (mostly are in the form of a tranche
of European Medium Term Note Programme while others are
in the form of a debt instrument issued by international
financial institutions of well-accepted credit standings)
that provides an investment return linked to the price
performance of a specified equity asset.
HYNs are normally offered to investors at deep discounted
prices to their nominal par values. At maturity, subject
to the terms of the HYNs and depend on the price level
of the underlying equity asset as compared to the strike
price, investors may redeem at the nominal par value
of the notes, or as the case may be, redeem by taking
or making delivery of the underlying equity asset at
the strike price.
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2. |
What are the factors that
can affect HYNs' prices? |
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The amount of discount reflects two main
market factors:
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the level of interest rate of a similar money
market instrument; and |
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the premium of underwriting the risks of price
volatilities in the market of the underlying equity
asset. |
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3. |
How many different types
of HYNs are there? |
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Based on the short-term view on the price
performance of the underlying equity asset, an investor
can trade "Bull" HYNs, "Bear" HYNs
and "Strangle" HYNs, corresponding to the investor's
Bullish, Bearish or "boxed-in-a-range" outlook
of the underlying equity asset. For further details, please
click HERE. |
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4. |
What is the primary market
for HYNs? |
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Primary international financial institutions
and investment banks that are active players in the securities
markets issue HYNs. In the primary markets, HYNs are originated
by these international financial institutions and offered
to investors through the private banking firms and securities
dealers' distribution network. Investor can tailor-made
his own structure of HYN to meet his investment objective
or to suit his risk profile. The minimum investment amount
of HYNs in the primary markets is HK$1,000,000. |
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5. |
What is the secondary market
for HYNs? |
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Most HYNs are traded in the secondary markets
after they are successfully issued in the primary markets.
There are hundreds of HYNs outstanding for investor to
buy and sell in the secondary markets. In most circumstances,
issuers will provide bid and offer prices in the secondary
markets for HYNs issued by them. That means investor can
have a better protection on his own investment in the
case where he has the need to liquidate his HYN positions
when the market goes against him. The minimum investment
amount of HYNs in the secondary markets is as little as
HK$100,000. For further details, please click HERE. |
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6. |
What are the features of
trading HYNs? |
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Abundant choices of stocks linked to HYNs:
Investor can choose between a wide range of the
listed blue chip stocks and some actively traded
red chip stocks in Hong Kong. Apart from Hong Kong
stocks, investor can also buy HYNs with underlying
stocks listed in other major stock exchanges, like
US stocks, Singapore stocks. The HYNs will be denominated
in the currency of the stock traded. |
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Flexibility in Your Time of Redemption:
If the value of the selected underlying securities
appreciate during the note period, investor can
redeem his note at the secondary market anytime
during the HK Stock Exchange trading hours to maximize
profit. On the other hand, if stock market turns
different as what the investor has anticipated,
he can also redeem his note in order to minimize
his loss. |
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7. |
An example of trading a
Bull HYN |
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Mr. Chan takes a Bullish view on a blue
chip telecom stock in the short term, and wants to invest
in related Bull HYNs. Mr. Chan finally decides to invest
a nominal HK$1,000,000 on HYNs in the primary market with
the following features: |
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Features |
Details |
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Linked Stock |
A blue chip telecom stock |
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Denomination |
HK$1,000,000 |
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Annualized Yield |
21.02% |
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Maturity |
48 days |
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Prices: |
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Spot price at trading |
HK$11.30 |
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Strike price |
HK$10.17 (90% of spot price) |
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Note issuance price |
97.31% (i.e. actual settlement amount is
HK$1,000,000 x 97.31% = HK$973,100 |
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Significant dates: |
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Trade Date |
August 09 |
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Settlement Date |
August 23 |
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Valuation Date |
October 08 |
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Maturity Date |
October 10 |
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| Redemption scenarios at maturity: |
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| A. |
Stock price on valuation day 
strike price |
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At the close of the stock market, if the stock
trades above the strike price at HK$10.17, Mr. Chan
will get a return in cash equal to the denomination
value HK$1,000,000 of the HYNs. The return is HK$26,900
or 21.02% p.a. ([(HK$1,000,000-HK$973,100) / HK$973,100]
x 365 / 48) |
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| B. |
Stock price on valuation day < strike price |
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If the stock price drops below HK$10.17 on the
close of trading on the valuation day, the issuer
has the option to deliver Mr. Chan the 98,328 shares,
equivalent to the denomination value calculated
on the strike price.
(HK$1,000,000 / HK$10.17 = 98,328 shares) |
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Notes:
#: The breakeven price, at which Mr. Chan is neither at
gain nor loss if he sells the stocks, in scenario B is
HK$9.90 per share (HK$973,100 / 98,328 shares). |
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8. |
An example of trading a
Bear HYN |
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Mr. Chan takes a Bearish view on a blue
chip property stock in the short term, and wants to invest
in related Bear HYNs. Mr. Chan finally decides to invest
a nominal HK$1,000,000 on HYNs in the primary market with
the following features: |
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Features |
Details |
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Linked Stock |
A blue chip property stock |
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Denomination |
HK$1,000,000 |
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Annualized Yield |
14.32% |
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Maturity |
47 days |
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Prices: |
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Spot price at trading |
HK$32.30 |
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Strike price |
HK$35.53 (110% of spot price) |
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Note issuance price |
98.19% (i.e. actual settlement amount is
HK$1,000,000 x 98.19% = HK$981,900 |
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Significant dates: |
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Trade Date |
August 10 |
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Settlement Date |
August 24 |
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Valuation Date |
October 08 |
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Maturity Date |
October 10 |
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| Redemption scenarios at maturity: |
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| A. |
Stock price on valuation day 
strike price |
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At the close of the stock market, if the stock
trades below the strike price at HK$35.53, Mr. Chan
will get a return in cash equal to the denomination
value HK$1,000,000 of the HYNs. The return is HK$18,100
or 14.32% p.a. ([(HK$1,000,000 - HK$981,900) / HK$981,900]
x 365 / 47) |
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| B. |
Stock price on valuation day > strike price |
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If the stock price closes above HK$35.53 on the
close of trading on the valuation day, Mr. Chan
will receive payment of the Cash Settlement Amount
in respect of each Denomination, being an amount
equal to the Note Denomination LESS the product
of the Share Amount and the Difference between the
Reference Share's closing price and the Strike Price.
HK$1,000,000 - 28,145 * (closing price - HK$35.53) |
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9. |
An example of trading a
strangle HYN |
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Mr. Chan takes a sideway view on a blue
chip consolidated enterprises stock in the short term,
and wants to invest in related Strangle HYNs. Mr. Chan
finally decides to invest a nominal HK$1,000,000 on HYNs
in the primary market with the following features: |
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Features |
Details |
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Linked Stock |
A blue chip consolidated enterprises stock |
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Denomination |
HK$1,000,000 |
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Annualized Yield |
36.85% |
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Maturity |
47 days |
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Prices: |
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Spot price at trading |
HK$19 |
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Strike price |
HK$17.10 / $20.90 (90%-110% of spot price) |
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Note issuance price |
95.47% (i.e. actual settlement amount is
HK$1,000,000 x 95.47% = HK$954,700 |
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Significant dates: |
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Trade Date |
August 10 |
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Settlement Date |
August 24 |
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Valuation Date |
October 08 |
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Maturity Date |
October 10 |
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| Redemption scenarios at maturity: |
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| A. |
Stock price on valuation day
lower strike price
upper strike price |
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At the close of the stock market, if the stock
trades at or above the lower strike price at HK$17.10
and trades at or below the upper strike price at
HK$20.90 Mr. Chan will get a return in cash equal
to the denomination value HK$1,000,000 of the HYNs.
The return is HK$45,300 or 36.85% p.a. ([(HK$1,000,000
- HK$954,700) / HK$954,700] x 365 / 47) |
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| B. |
Stock price on valuation day < lower strike
price |
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If the stock price closes below HK$17.10 on the
close of trading on the valuation day, the issuer
has the option to deliver Mr. Chan the 58,480 shares,
equivalent to the denomination value calculated
on the strike price. |
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(HK$1,000,000 / HK$17.10 = 58,480 shares) |
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| C. |
Stock price on valuation day > upper strike
price |
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If the stock price closes above HK$20.90 on the
close of trading on the valuation day, Mr. Chan
will receive payment of the Cash Settlement Amount
in respect of each Denomination, being an amount
equal to the Note Denomination LESS the product
of the Share Amount and the Difference between the
Reference Share's closing price and the Strike Price.
HK$1,000,000 - 58,480 * (closing price - HK$20.90) |
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10.What are the associated
risks? |
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Investing in HYNs involves directional price risks.
The price of the underlying stock may go up, or
down, which may adversely affect the of investments
in HYNs. |
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Investing in HYNs involves price volatility risks.
The price volatility of the underlying stock may
decrease or increase. Within the period of time
that the investor is holding positions in HYNs,
abrupt changes in the price volatility of the underlying
stock may adversely affect the return of investments
in HYNs. |
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HYNs are mostly non-listed securities where transferability
and liquidity in the secondary market may be highly
restrictive. Such restrictions on transferability
or the lack of liquidity (as the case may be) may
adversely affect the ability of investors in HYNs
to affect the best strategy to secure investment
returns. |
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Investing in HYNs also involves credit risks.
The risk of default by issuers of HYNs could stop
the holders from redeeming the investment principal
from the issuers and adversely affect their rights
of claim in full amount the investment returns that
they could otherwise be entitled. |
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