China stimulus creates hedging headaches for HK warrants
Dealers say options liquidity issues during Hang Seng’s rollercoaster ride made the products tricky to risk manage and price
Gyrations in Chinese stocks in recent weeks – driven by central bank stimulus – have sent index volatility soaring, creating hedging headaches for market-makers and widening Hong Kong warrants’ traditionally paper-thin bid-offer spreads.
“Unsurprisingly, warrant issuers have been facing a lot of challenges,” says a listed products sales head at one warrants issuer in Hong Kong.
“One is to cover the risk that they have, because the change of the spot leads to a change of delta and volatility, and
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