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Equity Linked Instruments (ELI) A New Way to Invest Bear Range Bull Equity Linked Instruments on HKEx Listed Equity Linked Instruments (ELI) are a new investment product available on Hong Kong Exchanges and Clearing Limited (HKEx). They are listed on the securities market and traded via AMS/3, the third generation Automatic Order Matching and Execution System, subject to HKEx's rules and regulations. ELI are a structured product issued by banks and financial institutions in many financial markets worldwide. They are marketed to retail and institutional investors who want to earn a higher interest rate than the rate on an ordinary time deposit and accept the risk of repayment in the form of the underlying shares or losing some or all of their investment. Similar to other investments, ELI investors should familiarise themselves with the product before making any investment decision. When an investor purchases an ELI, he is indirectly writing an option on the underlying stock. If the market moves as the investor expected, he earns a fixed return from his investment which is derived mainly from the premium received on writing the option. If the market moves against the investor's view, he may lose some or all of his investment or receive shares that may worth less than the initial investment. Types of ELI To match their directional view on the underlying securities, investors may choose from 3 different types of ELI listed on HKEx - Bull, Bear and Range. Other types of ELI may be traded on HKEx in future. Bull ELI Investors taking a bullish view on the underlying security may consider a Bull ELI. This offers two possible forms of payback on expiry*: ) If on the expiry date the closing price of the underlying security is AT or ABOVE the strike price, investors will receive a cash payment at the total par value of the ELI (total investment plus interest). * If on the expiry date the closing price of the underlying security is BELOW the strike price, investors will receive a predetermined quantity of the underlying security at the strike price (total par value/strike price). If the ELI is cash settled in lieu of share delivery, investors will receive a cash payment based on the closing price of the underlying security. Total Investment for One EXAMPLE $32,800 Board Lot of Bull ELI Underlying Security Stock A (400 shares) Strike Price (Underlying Security) $85 No. of Outstanding Days 100 days Potential Yield 13.35 per cent p.a. $34,000 Payback if Stock A closes ($32,800 x (1 +13.35% at or above $85 on Expiry Date x 100/365)) Payback if Stock A closes below $85 on Expiry Date 400 Stock A shares COMPARISON OF PAYBACK POSSIBILITIES Closing Price $75 $85 $95 of Stock A on Expiry Date Payback 400 Stock $34,000 $34,000 A shares Profit / Loss -$2,800 $1,200 $1,200 (assuming the shares are sold at $75) Bear ELI Investors who are bearish on the underlying security may consider a Bear ELI, which offers two possible forms of payback on expiry*: ) If on the expiry date the closing price of the underlying security is BELOW the strike price, investors will receive a cash payment at the total par value of the ELI (total investment plus interest). * If on the expiry date the closing price of the underlying security is AT or ABOVE the strike price, investors will receive a cash payment from the issuer according to the following formula: Par value per board lot of the ELI - [number of underlying shares at strike price per board lot of ELI x (closing price - strike price)] where the number of underlying shares at strike price equals to the total par value divided by strike price. The cash payment will never be negative and the amount will be zero if the closing price is 2 times or more than the strike price. Total Investment for One $34,300 EXAMPLE Board Lot of Bear ELI Underlying Security Stock A (400 shares) Strike Price (Underlying Security) $89 No. of Outstanding Days 100 days Potential Yield 13.83 per cent p.a. $35,600 Payback if Stock A closes ($34,300 x (1 + 13.83% below $89 on Expiry Date x 100/365)) Payback if Stock A closes at $31,600 or above $89 (e.g. $99) on ($35,600 - [400 x ($99 - Expiry Date $89)]) COMPARISON OF PAYBACK POSSIBILITIES Closing Price $79 $89 $99 $178 of Stock A on Expiry Date Payback $35,600 $35,600 $31,600 $0 Profit / Loss $1,300 $1,300 -$2,700 -$34,300 Range ELI Investors foreseeing a neutral view on the underlying security may consider a Range ELI, which offers three possible forms of payback on expiry*: ) If on the expiry date the closing price of the underlying security is WITHIN the range of the two strike prices (AT or ABOVE the lower strike price and BELOW the upper strike price), investors will receive a cash payment at the total par value of the ELI ( total investment plus interest). * If on the expiry date the closing price of the underlying security is AT or ABOVE the upper strike price, investors will receive a cash payment from the issuer according to the following formula: Par value per board lot of the ELI - [number of underlying shares at lower strike price per board lot of ELI x (closing price - upper strike price)] where the number of underlying shares at lower strike price is equal to the total par value divided by lower strike price. The cash payment will never be negative and the amount will be zero if the closing price equals or exceeds the sum of the lower and upper strike prices. + If on the expiry date the closing price of the underlying security is BELOW the lower strike price, investors will receive a predetermined quantity of the underlying security at the lower strike price (total par value of ELI/ lower strike price). If the ELI is cash settled in lieu of share delivery, investors will receive a cash payment based on the closing price of the underlying security. Total Investment for One Board EXAMPLE $32,400 Lot of Range ELI Underlying Security Stock A (400 shares) Upper Strike Price (Underlying Security) $89 Lower Strike Price (Underlying Security) $85 No. of Outstanding Days 100 days Potential Yield 18.02 per cent p.a. Payback if Stock A closes at $34,000 EXAMPLE or above $85 and below ($32,400 x (1 + $89 on Expiry Date 18.02% x 100/365)) Payback if Stock A closes at $30,800 or above $89 (e.g. $97) on ($34,000 - [400 x ($97 Expiry Date - $89)]) Payback if Stock A closes below $85 on Expiry Date 400 stock A shares COMPARISON OF PAYBACK POSSIBILITIES Closing Price $79 $87 $97 $174 of Stock A on Expiry Date Payback 400 Stock $34,000 $30,800 $0 A shares Profit / Loss -$800 $1,600 -$1,600 -$32,400 (assuming the shares are sold at $79) * Investors should refer to their brokers or the listing document for the exact payback. Benefits of Investing in Listed ELI Regulated Market ELI issuers are regulated by HKEx and must satisfy the stringent listing requirements of the Stock Exchange of Hong Kong, a wholly-owned subsidiary of HKEx. The trading and settlement of ELI are conducted on HKEx's established systems and are also regulated by the Securities and Futures Commission. Transparency ELI offered by issuers are traded on HKEx and their potential yields and other pertinent information are shown on all major information systems. Investors may browse and compare all ELI potential yields, payment dates, strike prices and market prices of the underlying securities, and consult their brokers on their ELI investment decisions. ELI price quotations are disseminated during trading hours. Convenience Investors may buy and sell ELI available on HKEx through brokers anytime during trading hours and ELI are settled in the same way as ordinary stocks. Liquidity In general, ELI available on HKEx can be bought and sold at any time on or before the last trading day. ELI are a buy and hold product and issuers have appointed liquidity providers to provide liquidity by way of continuous quotation or quote requests. Liquidity providers may act as counterparties for investors to buy and sell ELI. Investors can also sell their ELI to other investors. Low Entry Barrier The HKEx ELI market is for the participation of retail and high net worth investors. ELI are purchased in board lot sizes and the minimum investment amount is similar to equities. Flexibility The three types of ELI give investors flexibility to choose an investment that matches their market view. Points to Note When Investing in ELI Exposure to Equity Market Investors are exposed to price movements in the underlying security and the stock market and investors must be prepared to accept the risk of receiving the underlying shares or a payment less than their original investment. Investors may lose part or all of their investment if the price of the underlying security moves against their investment view. Potential High Yield but Limited Gain While most ELI offer a yield that is potentially higher than the interest on fixed deposits and traditional bonds, the return on investment is limited to the potential yield of the ELI. Dividends and Corporate Actions Any dividend payment on the underlying security may affect its price and the payback of the ELI at expiry due to ex-dividend pricing. Investors should also be aware that issuers may make adjustments to the ELI due to corporate actions on the underlying security. Potential Yield Investors should consult their brokers on fees and charges related to the purchase and sale of ELI and payment/delivery at expiry. The potential yields disseminated by HKEx have not taken fees and charges into consideration. 1 Where can I buy and sell ELI? You can buy or sell ELI traded on HKEx Frequently Asked Questions about ELI through your broker in the same way as you buy and sell stocks. There is no need to open separate trading accounts for ELI. 2 What is the minimum investment amount? ELI are traded in board lots. The minimum investment amount is usually similar to equities. 3 What transaction fees do I need to pay when I buy or sell ELI? Like buying and selling stocks, you need to pay brokerage commission, transaction levy, trading fee and, if applicable, stamp duty. For stamp duty on ELI transactions, investors should refer to the issuers' listing documents. Investors would need to pay stamp duty if they hold the ELI until expiry and there is physical delivery of the underlying shares on the payment date. 4 What happens at expiry? When ELI are issued, issuers will indicate in the listing document and launch announcement whether the ELI is to be settled by a cash payment or physical delivery upon expiry. Once listed, neither the issuers nor the holders are allowed to opt for an alternative settlement method at expiry. Depending on the type of ELI purchased and the closing price of the underlying security on the expiry date in relation to the strike price, you will receive a cash payment or physical shares on the payment date. In case of physical settlement, the underlying securities will be delivered in board lots to ELI holders; any fractional shares and odd lots will be paid in cash, subject to rounding, at the value of those shares at the closing price on the expiry date. 5 Will I get a certificate for the ELI that I have purchased? ELI are sold without physical certificates. Your brokers and custodian banks may act as custodians to hold the ELI for you, or you may hold the ELI in an Investor Account with Hong Kong Clearing. If you have maintained a Stock Segregated Account, your statements will show your ELI holdings and movements in the account. 6 How do I obtain basic information on ELI? Investors can get the basic information on an ELI from its stock short name. The first two characters will represent the abbreviation of the issuer's name, followed by the short name of the underlying security, the settlement method upon expiry ( * for physical settlement and @ for cash settlement when closing price on expiry is below strike or lower strike price), ELI type (U for Bull, E for Bear and R for Range), the expiry year and the expiry month. In addition, investors can also obtain information about the issuers and the terms and conditions of an ELI from the listing document. Most information vendors also carry additional information such as potential yield, expiry and payment dates, provided by HKEx. 7 How can I calculate the potential yield of an ELI? The potential yield of an ELI can be calculated by using the par value, the ask price and the number of outstanding days (which can be obtained from the Listed ELI Financial Information Pages on HKEx trading terminals or equivalent pages on vendors' terminals) according to the following formula: Par Value - Ask Price 365 X X 100% Ask Price No. of Outstanding Days where No. of Outstanding Days is the number of days from the Settlement Date to the Payment Date of the ELI. It should be noted that the potential yield calculated in this way is on an annualised basis and does not take into account any transaction costs that may arise from trading and settling the ELI trade as well as settlement at expiry. 8 What are the similarities and differences in trading and settlement arrangement between ELI and stock? Stock ELI Trading Traded on HKEx during Same trading hours Trading Unit Stocks are traded in ELI on HKEx are traded in shares. Purchase and sale ELI units that are similar of shares are in board lots to shares for stocks. or multiples except in the Purchase and sale of ELI odd lot market. are in board lots or multiples. No odd lots are allowed. Transaction Brokerage commission, Same fees transaction levy, trading fee, and, if applicable, stamp duty Accessibility Any broker Same Settlement T+2 Same Underlying Nil Individual stock Liquidity Normally not available Provider Normally available Last trading N/A One trading day before day the expiry date Usually within 28 days to Duration No expiration date two years, as specified by the issuer 9 Why is turnover low for ELI listed on HKEx? Turnover reflects the buying and selling activities of a security. The turnover of ELI is relatively low because ELI is a buy and hold product. It should be noted that turnover for ELI is a rough measure on the quantity or value sold. Liquidity Providers appointed by ELI issuers will provide liquidity to ELI listed on HKEx. 10 Why is liquidity low for ELI listed on HKEx? Unlike stocks, ELI are not a trading product. Investors tend to hold ELI until expiry to earn the interest (potential yield), like fixed deposit. Liquidity Providers are appointed by the issuer to provide liquidity, and investors can, via their brokers, buy from and sell to the Liquidity Provider directly or to other investors. Financial Information on Listed ELI L I S T E D E Q U I T Y L I N K E D I N S T R U M E N T S F I N A N C I A L I N F O R M A T I O N U P D A T E T I M E : 1 0 : 4 5 C U R R E N C Y : H K D T Y P E : B U L L U N D E R L Y I N G : H S B C H O L D I N G S ( 5 ) < _ _ _ _ _ _ _ E L I _ _ _ _ _ _ _ _ _ > U N D E R L Y I N G A T U P D A T E < _ _ _ _ _ E L I A T U P D A T E _ _ _ _ _ _ > O / S P A Y M E N T C O D E S H O R T N A M E S T R I K E N O M I N A L / S P O T B I D A S K Y I E L D % D A Y S D A T E 1 7 0 1 A A – H S B C @U 0 2 0 9 A 8 5 . 0 0 8 9 . 0 0 7 . 8 0 * 8 . 2 0 * 1 3 . 3 5 1 0 0 0 4 S E P 0 2 – 4 s 2 2 . 8 1 / – 2 s 1 8 . 0 2 + 2 s 8 . 8 0 / + 4 s 4 . 3 5 1 7 0 2 B B – H S B C @U 0 2 0 9 A 8 6 . 0 0 8 9 . 0 0 7 . 7 5 * 8 . 1 5 * 1 7 . 6 8 1 1 4 1 8 S E P 0 2 – 4 s 2 6 . 1 8 / – 2 s 2 1 . 8 8 + 2 s 1 3 . 5 8 / + 4 s 9 . 5 9 1 7 0 3 C C – H S B C @U 0 2 1 0 A 8 7 . 0 0 8 9 . 0 0 7 . 7 0 * 8 . 1 0 * 1 9 . 7 4 1 3 7 1 1 O C T 0 2 – 4 s 2 6 . 9 8 / – 2 s 2 3 . 3 1 + 2 s 1 6 . 2 5 / + 4 s 1 2 . 8 4 1 7 0 4 D D – H S B C @U 0 2 1 0 A 8 8 . 0 0 8 9 . 0 0 7 . 6 5 * 8 . 0 5 * 2 2 . 6 7 1 5 0 2 4 O C T 0 2 – 4 s 2 9 . 4 5 / – 2 s 2 6 . 0 2 + 2 s 1 9 . 4 1 / + 4 s 1 6 . 2 2 N O T E : L a s t L i n e o f e a c h E L I s h o w s i t s Y I E L D % a t + / – 2 & 4 s p r e a d s o n A S K a t u p d a t e Financial Information Page The financial information pages display the strike price, nominal/spot price of the underlying security, bid and ask prices of ELI, annualised yield at the ask price and at ± 2 and 4 spreads of the ask price, number of outstanding days (between the trade settlement date and payment date) and payment date, at update time for reference. The yields at ± 2 and 4 spreads away from the ask price at update time serve as a reference if the then current ask price on the stock page has moved. The financial information pages are updated on a periodic basis. Investors should consult their brokers for the latest yield and price prior to making their investment decision. The ELI displayed on the financial information pages are arranged by Type (in the order of Bull, Bear and Range), then in ascending order of the Underlying Stock Code, the Strike Price and then the Potential Yield (based on previous closing). Stock Page The par value of each ELI and its current bid and ask prices can be found on their stock pages. The number of underlying shares per ELI (also called the entitlement ratio) is equal to the par value divided by the (lower) strike price and should be in multiples or subdivisions of 10. Hong Kong Exchanges and Clearing Limited 12/F, One International Finance Centre 1 Harbour View Street, Central, Hong Kong Tel: (852) 2522 1122 Fax: (852) 2295 3106 Email: firstname.lastname@example.org Website: www.hkex.com.hk Glossary of Terms Entitlement ratio The conversion rate for one share of the underlying security. Expiry date The date on which the closing price of the underlying security is compared with the strike price to determine the result of the ELI investment. (Note: In general, the closing price of the underlying security as published by the Stock Exchange on the expiry date irrespective of whether the underlying security is trading cum-all or ex- entitlement shall be used for the determination of the payback for all three types of ELI.) Outstanding days Number of days from the Settlement Date of an ELI transaction (whether sale or purchase) to the Payment Date of the ELI. Par value The denomination of the ELI. Payment date The date when the redemption of the ELI becomes due. The payment date is the third settlement day after the last trading date. For example, if the last trading date falls on Monday, payment date will be on Thursday, given Tuesday and Wednesday being settlement days. Spot price The current nominal price of the underlying security. Strike price The pre-determined price of the underlying security which, depends on the type of ELI, determines whether the investors will receive the par value, the underlying security or a reduced amount of the par value upon expiry of the ELI. Yield The potential percentage return on an investment relative to the amount invested, expressed on an annualised basis. The information contained herein is solely applicable to the listed ELI market on HKEx. Disclaimer: The material contained herein is for general information only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities. Investors should read the listing document from the issuers carefully, ensure that they understand the nature of this product, and where necessary consult their own financial advisers as to the suitability of this product in light of their particular financial circumstances prior to any investment decision.
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