This question assesses the understanding of how a freefloat-adjusted market capitalization-weighted index is calculated, focusing on the components that are excluded from the freefloat and the administrative tools used for balancing. Statement I is correct because shares held by another listed company exceeding 5% are considered cross-holdings and are excluded from the freefloat calculation as strategic holdings. Statement II is correct as the Cap Factor (CF) is an administrative tool specifically designed to limit the influence of any single large-cap stock, often capping its weight at a predefined level like 15%, to ensure index diversification. Statement III is incorrect because shares held by a director are only excluded if that individual director’s holding exceeds 5% of the share capital; holdings below this threshold are typically included in the freefloat. Statement IV is incorrect because the rounding rule for the Freefloat-adjusted Factor (FAF) is more nuanced; it is generally rounded up to the nearest multiple of 1%, and only rounded to the nearest 5% for FAFs that are above 10%. Therefore, statements I and II are correct.

This question assesses the fundamental principle of bond valuation concerning the relationship between a bond’s coupon rate, its yield to maturity (YTM), and its market price. The market price of a bond is the present value of all its future cash flows (coupon payments and principal repayment) discounted at the current market yield. When the coupon rate is lower than the prevailing market yield for similar bonds, the bond’s fixed payments are less attractive than what new bonds are offering. To compensate for this lower coupon, the bond must be sold for a lower price than its face value. This price reduction increases the bond’s overall return to the investor, bringing its yield in line with the current market rate. Conversely, if a bond’s coupon rate were higher than the market yield, it would trade at a premium (above face value). If the coupon rate equals the market yield, the bond trades at par (equal to face value).

To determine the final outcome, each corporate action must be processed sequentially. First, calculate the cost of acquiring the warrants. Second, determine the number of shares obtained upon exercising these warrants and the associated exercise cost. Third, calculate the increase in shareholding due to the bonus issue. Note that a bonus issue does not involve any cash flow for the shareholder. Fourth, calculate the cash inflow from the dividend payment, which is based on the total number of shares held after the bonus issue. Finally, sum all cash outflows (warrant purchase, warrant exercise) and subtract the cash inflow (dividend payment) to find the net cash outlay.

This question assesses the candidate’s ability to interpret and reconcile two key profitability ratios: Earnings Per Share (EPS) and Return on Equity (ROE). EPS is calculated as (Profit after tax / Weighted average number of shares outstanding), measuring the profit attributable to each ordinary share. ROE is calculated as (Profit after tax / Average shareholders’ equity), measuring the efficiency with which a company uses its equity base to generate profits. For EPS to increase while ROE decreases, the numerator (Profit after tax) must have increased, but the denominator of the ROE formula (Average shareholders’ equity) must have increased at a proportionally faster rate. A major equity fundraising event, such as a rights issue or a large placement of new shares, would significantly increase the company’s equity base. If this new capital has not yet been fully deployed to generate a corresponding level of profit, the ROE ratio will fall despite the rise in absolute profit that drives the EPS up. Conversely, a share buyback would reduce both shares outstanding and equity, likely increasing both ratios. A one-off gain would boost profits, increasing both ratios. An increase in debt does not directly increase the equity base.

This question assesses understanding of a broker’s fundamental duties towards its clients under the SFC’s regulatory framework. Statement I is correct; paragraph 6.3 of the Code of Conduct for Persons Licensed by or Registered with the SFC requires a licensed person to provide the client with a copy of the signed client agreement. Statement II is incorrect; the Securities and Futures (Client Money) Rules strictly prohibit a licensed corporation from using client money for its own operational purposes. Client money must be kept segregated in a trust account. Statement III is incorrect; the Securities and Futures (Client Securities) Rules require a licensed corporation to obtain express written authority from a client before it can pledge the client’s securities. Verbal consent is insufficient. Statement IV is correct; this reflects the ‘know your client’ (KYC) and suitability obligations under paragraph 5 of the Code of Conduct, which mandates that a firm must understand a client’s financial situation, investment experience, and objectives to provide suitable advice. Therefore, statements I and IV are correct.

Statement I is correct. Positive convexity is a key feature of conventional bonds, describing the non-linear, curved relationship between price and yield. It means that for a given change in yield, the price increase from a yield decrease is greater in magnitude than the price decrease from a yield increase of the same size. This is advantageous for the bondholder. Statement II is correct. A portfolio of bonds will lose value if interest rates rise. To hedge this risk, a manager can take a short position in interest rate futures. If rates rise as anticipated, the price of the underlying instrument in the futures contract will fall, generating a profit on the short futures position that helps offset the loss on the bond portfolio. Statement III is incorrect. Convexity is positively related to maturity and negatively related to the coupon rate. Therefore, a portfolio of long-maturity, low-coupon bonds would exhibit high convexity, not the other way around. Statement IV is incorrect. A defining characteristic of futures contracts is that they are standardized and traded on a regulated exchange, not bespoke over-the-counter (OTC) agreements. Customized, non-standardized derivative contracts are typically forwards or swaps. Therefore, statements I and II are correct.

Pooling risk arises when a brokerage firm re-pledges securities from its clients’ margin accounts to a bank as collateral for its own financing. Statement I is correct because if the brokerage firm defaults on its loan, the bank has the right to liquidate the re-pledged securities (which belong to the margin clients) to recover the debt. Statement III is also correct; the bank’s action of liquidating the collateral is a right exercised against the defaulting broker, and it does not require the individual margin client’s consent. Statement II is incorrect because the nature of pooling and re-pledging means the client’s securities are not fully segregated from the broker’s financial risks in this context, and recovery is not guaranteed. Statement IV is incorrect as the client could lose all the securities held in the margin account, the value of which could be significantly greater than the initial margin paid. Therefore, statements I and III are correct.

This question assesses the understanding of key bond pricing concepts. The ‘clean price’ is the quoted market price of a bond, excluding any accrued interest. The ‘dirty price’ represents the total amount the buyer pays at settlement, which is calculated by adding the accrued interest to the clean price. Accrued interest is the portion of the next coupon payment that has accumulated since the last payment date; it is paid by the buyer to the seller to compensate the seller for the interest earned during the period they held the bond. Statement I correctly defines the dirty price as the clean price plus accrued interest. Statement II accurately describes the function of accrued interest as compensation to the seller. Statement III is incorrect; a bond trades at a premium when its clean price is higher than its face value, which typically occurs when its coupon rate is above the prevailing market yield. Statement IV is also incorrect; while a bond quoted ‘at par’ has a clean price equal to its face value, accrued interest is still payable if the trade settles between coupon payment dates. Therefore, statements I and II are correct.

In the process of an initial public offering (IPO) on the Stock Exchange of Hong Kong (SEHK), several professional parties are engaged, each with distinct responsibilities. The sponsor acts as the primary coordinator, ensuring the listing applicant is suitable and meets all the requirements of the Listing Rules. The reporting accountant is responsible for auditing the company’s financial statements and preparing the accountant’s report included in the prospectus, verifying that the financial information is accurate and complies with accounting standards. The underwriter’s main function is to manage the sale and distribution of the shares to investors, often assuming the financial risk if the shares are not fully subscribed. The legal advisers are tasked with conducting legal due diligence and ensuring the company’s structure, contracts, and operations comply with all relevant laws and regulations, including the Companies Ordinance and the Listing Rules. A critical part of their role, especially for applicants from jurisdictions outside Hong Kong, is to advise on and implement any necessary corporate reorganization to align the company’s legal structure with the requirements for listing on the SEHK.

This question tests the candidate’s ability to calculate financial leverage and the return on invested capital in a margin trading scenario.

First, let’s establish the initial position:
– Total value of the investment: 10,000 shares HK$80/share = HK$800,000.
– Initial margin requirement: 60%.
– Tom’s invested capital (equity): HK$800,000 60% = HK$480,000.
– Margin loan from the broker: HK$800,000 (1 – 60%) = HK$320,000.

Now, let’s evaluate each statement:

Statement I: Leverage is calculated as the Total Asset Value divided by the Investor’s Equity. In this case, Leverage = HK$800,000 / HK$480,000 = 1.666… which is approximately 1.67 times. Therefore, statement I is correct.

Statement II: The return on invested capital is calculated as the net profit divided by the investor’s initial capital. If the shares are sold at HK$92, the profit is (HK$92 – HK$80) 10,000 shares = HK$120,000. The return on invested capital is HK$120,000 / HK$480,000 = 0.25, or 25%. Therefore, statement II is correct.

Statement III: If the shares are sold at HK$74, the loss is (HK$74 – HK$80) 10,000 shares = -HK$60,000. The loss on invested capital is -HK$60,000 / HK$480,000 = -0.125, or -12.5%. The statement claims the loss is 7.5%, which would be the loss calculated against the total asset value (-HK$60,000 / HK$800,000 = -7.5%), not the invested capital. This is a common misconception. Therefore, statement III is incorrect.

Statement IV: The calculation shown (margin loan / total asset value) represents the loan-to-value (LTV) ratio, not the financial leverage. As calculated for statement I, the leverage is Total Asset Value / Equity. Therefore, statements I and II are correct.

Statement I is incorrect. Any information, including forward-looking statements, presented during a roadshow must be consistent with the information contained in the prospectus. Presenting substantially more optimistic forecasts would be considered misleading and a violation of prospectus-related regulations under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) and the Securities and Futures Ordinance (Cap. 571). Statement II is correct. The roadshow is a crucial marketing and information-gathering exercise. It allows the issuer and its underwriters to present the investment case to institutional investors and, in return, gauge the level of demand for the shares, which is a key input for the book-building and final pricing process. Statement III is incorrect. The roadshow typically commences after the Listing Committee hearing but before the final prospectus is registered. It is conducted using a draft version of the prospectus, often referred to as a ‘pathfinder’ or ‘red herring’. The final prospectus is registered only after the price is determined, which happens at the end of the book-building process. Statement IV is correct. This is a core principle governing IPO marketing. To ensure a level playing field and prevent selective disclosure of material information, all materials and communications during the roadshow must not contradict the information disclosed in the draft prospectus. This ensures that all potential investors are making their decisions based on the same set of vetted information. Therefore, statements II and IV are correct.

This question assesses the understanding of fundamental bond valuation principles.

Statement I is correct. The bond’s price is determined by discounting its future cash flows (coupons and principal) by the yield to maturity (YTM). In this scenario, the YTM (10%) is higher than the coupon rate (5%). When the required market yield is greater than the fixed coupon rate, the bond must be priced below its face value (par value) to offer a competitive return to investors. This is known as trading at a discount.

Statement II is correct. There is an inverse relationship between bond prices and interest rates (or yields). If market interest rates fall, the required yield on the bond would also decrease. A lower discount rate applied to the same stream of future cash flows results in a higher present value. Therefore, the bond’s price would increase.

Statement III is incorrect. While the coupon rate determines the size of the cash flow payments, the yield to maturity is the market-driven discount rate used to calculate the present value of those cash flows. The YTM reflects the current required rate of return for an investment of similar risk and maturity and is therefore a primary determinant of the bond’s current price (present value).

Statement IV is correct. This statement accurately defines the Yield to Maturity (YTM). The YTM represents the total annualized rate of return an investor will receive if they purchase the bond at its current market price, hold it until maturity, and successfully reinvest all coupon payments at that same YTM rate. The scenario specifies the YTM is 10%. Therefore, statements I, II and IV are correct.

Statement I is correct. Under the SFC Code of Conduct, a licensed person must use due skill, care, and diligence. This includes ensuring the client’s order instructions are accurately understood and recorded. Confirming the key terms of the order (stock, quantity, price) with the client before execution is a fundamental step to prevent errors and disputes.

Statement II is incorrect. The Automated Matching System (AMS/3) of the Hong Kong Stock Exchange matches orders based on price priority first, and then time priority. A higher bid price will take precedence over a lower bid price, regardless of when the orders were entered. The statement that matching is done irrespective of the price limit is false.

Statement III is correct. The SFC Code of Conduct requires licensed corporations to use a telephone recording system to record all order instructions received from clients through the telephone. This creates an audit trail and helps resolve potential disputes about the terms of the order.

Statement IV is incorrect. The matching of an order in AMS/3 constitutes trade execution (T day), but not settlement. Settlement, which involves the final transfer of securities and money, occurs on the second settlement day after the transaction day (T+2) through the Central Clearing and Settlement System (CCASS). Share ownership is not transferred immediately upon matching. Therefore, statements I and III are correct.

Statement I is correct. A bond trades at a premium (a price higher than its par value) when its fixed coupon rate is greater than the current market yield (yield to maturity) for bonds of similar risk and maturity. Investors are willing to pay more for the higher-than-market coupon payments. Statement II is correct. The required rate of return, or yield, on any risky asset is fundamentally composed of the return on a risk-free asset plus a risk premium. This premium compensates the investor for taking on additional risks, such as credit risk (default risk), liquidity risk, and inflation risk, associated with the specific bond. Statement III is correct. The condition for a bond to be priced at its par value is that its coupon rate is exactly equal to its yield to maturity. At this point, the income stream from the coupons perfectly matches the market’s required return. Statement IV is incorrect. There is an inverse relationship between interest rates and the prices of existing fixed-coupon bonds. If the risk-free rate increases, the overall required yield in the market will also increase. To offer this higher yield, the price of the bond must decrease. Therefore, statements I, II and III are correct.

The Securities and Futures Commission (SFC) has issued specific guidelines concerning the security of internet trading. A core principle of these guidelines is that licensed corporations bear the primary responsibility for implementing robust controls to safeguard their clients’ assets and data. While client education on matters like password security and safe browsing habits is important and encouraged, it is considered a supplementary measure. The regulator mandates that firms must implement strong technical security measures as a baseline requirement. Among the most critical of these is two-factor authentication (2FA), which requires clients to provide two different types of evidence to prove their identity before accessing their account or authorising high-risk transactions. This control significantly mitigates the risk of unauthorized access even if a client’s password is compromised. Other actions, such as reporting incidents to the authorities or considering client compensation, are part of a firm’s incident response plan but do not represent the fundamental, ongoing preventative duty to secure the trading system itself.

This question assesses the understanding of the payoff calculation for a short call option position. The writer (seller) of a call option receives an upfront premium. Their potential profit is limited to this premium. However, their potential loss is theoretically unlimited. The net profit or loss at expiration is determined by comparing the spot price of the underlying asset to the option’s strike price. The formula for the payoff of a short call is: Premium Received – max(0, Spot Price at Expiration – Strike Price). If the spot price is at or below the strike price, the option expires worthless, and the writer keeps the entire premium as profit. If the spot price is above the strike price, the option is exercised. The writer is obligated to sell the underlying asset at the strike price, incurring a loss equal to the difference between the higher market (spot) price and the strike price. The net result is the initial premium received minus this loss from the exercise.

This question assesses the candidate’s understanding of the industry growth cycle, a key concept in fundamental analysis for equities. The cycle consists of four distinct stages: initial development, rapid expansion, mature growth, and decline. Each stage has unique characteristics regarding sales growth, competition, profitability, and cash flow. In the scenario, the electric vehicle (EV) infrastructure sector is described with features like explosive sales growth, the entry of new competitors, and significant reinvestment into R&D and capacity. These are hallmark characteristics of the ‘Rapid Expansion’ stage. During this phase, demand outstrips supply, attracting new players and leading to high revenue growth. Companies prioritize gaining market share over immediate profitability, hence the heavy capital expenditure and volatile earnings. The ‘Initial Development’ stage is characterized by high uncertainty and losses with an unproven product. The ‘Mature Growth’ stage sees slowing growth, stable competition, and a focus on efficiency and dividends. The ‘Decline’ stage involves falling sales and industry consolidation. An analyst must correctly identify the industry’s stage to make appropriate valuation and investment recommendations.

The Price-to-Earnings (P/E) ratio is a fundamental valuation metric calculated by dividing a company’s market price per share by its earnings per share (EPS). It indicates how much investors are willing to pay for each dollar of a company’s earnings. A high P/E ratio often suggests that the market has high expectations for the company’s future earnings growth. Such companies are typically referred to as ‘growth stocks’. Conversely, a low P/E ratio may indicate that a stock is undervalued relative to its earnings, or that the market has lower growth expectations. These are often categorized as ‘value stocks’. It is crucial to compare P/E ratios within the same industry, as average P/E levels can vary significantly between sectors. The ratio does not, by itself, provide direct information about a company’s debt levels, dividend policy, or overall financial stability.

Return on Equity (ROE) is a crucial profitability ratio that measures a company’s ability to generate profits from its shareholders’ investments. The formula is Profit After Tax divided by Average Shareholder’s Equity. While a higher ROE is generally seen as positive, it is essential for an analyst to understand its components. A high ROE can be driven by high profitability (net profit margin), efficient asset use (asset turnover), or high financial leverage (use of debt). When a company’s high ROE is primarily due to significant financial leverage, it indicates that the returns to shareholders are magnified by debt. This also implies a higher level of financial risk, as the company has a larger burden of debt service payments, which can become problematic during economic downturns or if profitability declines. Therefore, comparing ROE without considering the underlying capital structure can lead to misleading conclusions about management’s performance and the company’s risk profile.

The process of placing a securities order requires specific and essential details to ensure accurate and efficient execution through the exchange’s trading system, AMS/3. Statement I is correct because the client’s account number is a fundamental identifier required by the brokerage to link the trade to the correct client for execution, settlement, and record-keeping. Statement II is correct as the stock code is the unique identifier for the security on the exchange, and without it, the system cannot identify which company’s shares to trade. Statement IV is also correct because the quantity of shares and the price parameters (e.g., a limit price or market order instruction) define the core terms of the client’s order. Statement III, while critically important for client onboarding and providing investment advice under the SFC’s Code of Conduct (specifically regarding suitability), is not a piece of information required for the execution of every single client-initiated transaction. The suitability assessment is typically performed at the relationship level or when a recommendation is made, not re-verified for each execution-only order. The question focuses on the necessary details for order entry into AMS/3. Therefore, statements I, II and IV are correct.

The total amount a buyer pays for a bond on the settlement day is known as the ‘dirty price’. This price is composed of two parts: the ‘clean price’ and the ‘accrued interest’. The clean price is the quoted market price of the bond, which can be at par (100), at a premium (above 100), or at a discount (below 100). In this scenario, a quoted price of 101 means the bond is trading at a premium, so its clean price is 101% of its face value. Accrued interest is the portion of the next coupon payment that the seller has earned by holding the bond from the last coupon payment date up to the settlement date. Since the buyer will receive the full next coupon payment, the buyer must compensate the seller for this earned portion. Therefore, the total settlement amount is the clean price plus the accrued interest.

A bonus issue involves a company issuing new shares to existing shareholders at no cost, in proportion to their current holdings. This action capitalizes the company’s reserves or retained earnings into share capital. Statement I is correct because a bonus issue does not create new economic value; it simply divides the company’s existing value over a larger number of shares. Therefore, the total market value of an investor’s holding remains unchanged immediately after the issue. Statement II is correct because, with the total market value remaining constant and the number of shares increasing, the price per share must decrease to reflect this dilution. In this scenario, the initial value is 100,000 shares HKD 20 = HKD 2,000,000. After the 1-for-4 issue, the client will have 125,000 shares. The theoretical ex-bonus price becomes HKD 2,000,000 / 125,000 = HKD 16, which is lower than HKD 20. Statement III is incorrect as a bonus issue does not raise any new cash for the company; it is purely an accounting transaction. Statement IV is incorrect because the shares are issued on a pro-rata basis to all shareholders, meaning each shareholder’s percentage of ownership in the company remains the same. Therefore, statements I and II are correct.

Political factors, such as changes in government tariffs, can have a profound and direct impact on financial markets. The Hang Seng Index (HSI), as a barometer for the Hong Kong stock market, reflects the performance of its constituent stocks. The composition of the index is therefore critical. If the index has a heavy weighting in a particular sector, any political or economic event that specifically affects that sector will have a magnified impact on the overall index value. For instance, new trade tariffs on technology goods would likely cause a negative investor sentiment towards technology companies, leading to a fall in their share prices. Given that major technology firms are significant constituents of the HSI, this would exert downward pressure on the entire index. Other effects, such as changes in long-term economic structure or money market rates, are secondary or less direct consequences compared to the immediate impact on the share prices of the index’s component companies. Furthermore, the process for changing the constituent stocks of the HSI is based on a periodic review against specific criteria (market value, turnover, etc.) and is not an immediate reaction to market events.

The Price-to-Earnings (P/E) ratio is a fundamental valuation metric calculated by dividing a company’s market price per share by its earnings per share (EPS). It indicates how much investors are willing to pay for each dollar of a company’s earnings. A high P/E ratio often suggests that the market has high expectations for the company’s future earnings growth, and such stocks are typically classified as ‘growth stocks’. Conversely, a low P/E ratio may indicate that a stock is undervalued relative to its earnings or that the market has lower growth expectations. These are often referred to as ‘value stocks’. Therefore, when comparing two companies in the same industry, the one with the significantly higher P/E is generally perceived as having stronger growth prospects. It is important to note that the P/E ratio does not directly provide information about a company’s current profitability in absolute terms, its dividend policy, or its inherent risk level without further analysis.

To hedge a long stock position against a potential price decline, an investor needs an instrument that gains value when the stock price falls. A long put option grants the holder the right to sell the underlying asset at a specified price, and its value increases as the underlying stock’s price decreases. Therefore, the correct initial action is to purchase put options.

The next step is to calculate the number of contracts required to establish a delta-neutral hedge. This type of hedge is designed so that for a small change in the underlying stock price, the change in the value of the options position will offset the change in the value of the stock position. The formula is:

Number of Contracts = (Total Number of Shares to Hedge) / (|Option Delta| × Contract Size)

Applying the values from the scenario:
– Total Shares = 2,400
– Option Delta = -0.5 (the absolute value, 0.5, is used for the quantity calculation)
– Contract Size = 100 shares

Number of Contracts = 2,400 / (0.5 × 100) = 2,400 / 50 = 48 contracts.

Therefore, the investor should purchase 48 put option contracts to create a delta-neutral hedge for his stock holdings.

Duration is a critical concept in fixed-income portfolio management, measuring the sensitivity of a bond’s price to changes in interest rates. It is calculated as the weighted average of the maturities of all cash flows (coupons and principal). When a central bank raises short-term interest rates, it often leads to a ‘flattening’ of the yield curve. This means the difference (spread) between long-term and short-term bond yields decreases. In such a scenario, the prices of short-term bonds tend to fall more significantly than the prices of long-term bonds. To position a portfolio advantageously for this expected market movement, a manager would seek to reduce exposure to the more negatively affected short-term bonds and increase exposure to the relatively more stable long-term bonds. This strategic shift effectively increases the overall duration of the portfolio, aligning it with the expectation that long-maturity assets will outperform short-maturity assets as the curve flattens.

The calculation of Earnings Per Share (EPS) requires using the weighted average number of ordinary shares (WANS) as the denominator. This is to accurately reflect the amount of equity capital that was available to generate earnings throughout the reporting period. Statement I correctly describes the core mechanical principle of time-weighting: shares are included in the calculation based on the proportion of the period they were outstanding. Statement II correctly explains the underlying economic rationale for this principle: new capital from a share issue can only contribute to generating profits from the date it is received by the company. Therefore, its impact on the EPS denominator must be pro-rated. Statement III is incorrect; shares that exist at the beginning of the period are outstanding for the entire period, so they are effectively weighted by a factor of 1 (or 12/12 months). They are not weighted from their original historical issue date. Statement IV is also incorrect; using the year-end number of shares would inaccurately dilute the EPS figure, as it would not account for the fact that the capital from the new shares was not available for the full year. This method is not compliant with Hong Kong Financial Reporting Standards (HKFRS), specifically HKAS 33 ‘Earnings per Share’. Therefore, statements I and II are correct.

The debt-to-equity ratio is a key financial metric calculated as Total Debt divided by Total Equity. A decrease in this ratio indicates that a company is relying less on debt financing, which is generally viewed as a positive sign of improving financial health. This can be achieved by either reducing the numerator (Total Debt) or increasing the denominator (Total Equity).

Statement I describes the repayment of long-term bonds using retained earnings. This action directly reduces the company’s total debt, thus lowering the debt-to-equity ratio. This is a plausible explanation.

Statement II describes a successful rights issue, which involves issuing new shares to existing shareholders. This action increases the company’s share capital and total equity, thereby decreasing the debt-to-equity ratio. This is also a plausible explanation.

Statement III describes securing a new loan. This would increase the company’s total debt, causing the debt-to-equity ratio to rise, not fall. Therefore, this statement is incorrect.

Statement IV describes a share buyback program. This action reduces the company’s total equity because cash is used to repurchase shares, which are then often cancelled or held as treasury stock. A reduction in equity would cause the debt-to-equity ratio to increase, not decrease. Therefore, statements I and II are correct.

This question assesses understanding of the conflict of interest management required for research analysts under the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. Specifically, Paragraph 16 of the Code of Conduct addresses the preparation and dissemination of research reports. A core principle is that firms must manage conflicts between their different business functions, such as research and corporate finance (investment banking). When a firm has a significant relationship with a company that is the subject of its research, this relationship must be disclosed. The purpose of this disclosure is to allow investors to assess the potential for bias and to evaluate the objectivity of the research. Simply delaying the report is not the primary regulatory solution, as the conflict would still exist upon publication. Mandating a neutral rating would compromise the analyst’s duty to provide an independent and honest opinion. Allowing the investment banking division to approve the report would be a severe breach of the ‘Chinese Wall’ or information barrier, which is designed to prevent the flow of sensitive information and influence between departments.

The price of a derivative warrant is influenced by several key factors. One of the most significant is the volatility of the underlying asset. Volatility measures the magnitude of the underlying asset’s price fluctuations. A higher volatility implies a greater probability of large price movements in either direction. For both call and put warrants, this increased potential for a significant price swing enhances the likelihood that the warrant will become profitable (in-the-money) before expiry. Since a warrant holder’s potential loss is capped at the premium paid, while the potential gain can be substantial, higher volatility increases the warrant’s value. This principle applies equally to call warrants (which benefit from upward price swings) and put warrants (which benefit from downward price swings), as the increased chance of a large move in the favorable direction makes both more attractive.