Statement I is correct as one of the primary advantages of warrants is the gearing effect, which allows an investor to control a larger value of the underlying asset with a smaller initial investment, thus amplifying potential returns (and losses). Statement III is also correct; put warrants, which increase in value as the underlying asset’s price falls, can be used as a hedging tool to protect a portfolio against a market decline. Statement II is incorrect. According to the Listing Rules of the Stock Exchange of Hong Kong (SEHK), a warrant issuer is required to appoint a Liquidity Provider for each warrant issue, but there can only be one designated Liquidity Provider for any single issue. Statement IV is an overstatement and therefore incorrect. While the mandatory appointment of a Liquidity Provider significantly improves the liquidity of warrants and mitigates liquidity risk, it does not completely eliminate it. Risk can still exist, especially for warrants that are deeply out-of-the-money where market interest may be very low. Therefore, statements I and III are correct.

The quick ratio, also known as the acid-test ratio, is a stringent measure of a company’s ability to meet its short-term obligations without relying on the sale of inventory. The formula is (Current Assets – Inventory) / Current Liabilities. The numerator, known as ‘quick assets’, includes the most liquid current assets that can be converted into cash within a short period (typically 90 days). Statement I, Cash and cash equivalents, is the most liquid asset and is always included. Statement II, Trade receivables, represents money owed by customers and is expected to be collected in the short term, so it is also included. Statement III, Inventory, is specifically excluded from the quick ratio calculation because it may not be easily or quickly converted to cash without a significant price discount. Statement IV, Prepaid expenses, is a current asset but represents future expenses that have already been paid; it cannot be converted back into cash to pay liabilities and is therefore excluded from quick assets. Therefore, statements I and II are correct.

The correct answer is that Company X likely has superior cost control over its direct production inputs, but Company Y is more efficient at using its overall asset base to generate profits. The Gross Profit Margin specifically measures profitability after accounting for the Cost of Goods Sold (COGS). A higher margin, as seen with Company X, indicates better management of these direct costs or stronger pricing power. Return on Assets (ROA), however, provides a broader view of efficiency by measuring how much profit is generated for every dollar of assets. Company Y’s higher ROA signifies that it generates more income from its assets, suggesting superior asset management, higher asset turnover, or better control over operating expenses beyond COGS. One common misconception is that a high gross margin automatically means better overall operational management; however, this ratio does not account for selling, general, and administrative expenses or how efficiently assets are utilized, which are captured more broadly by ROA. Another incorrect conclusion is that Company Y’s lower gross margin points to poor management; it could simply reflect a different business strategy, such as a high-volume, low-margin model, which can be very successful if asset turnover is high, as suggested by its superior ROA. Finally, concluding that Company X is more profitable overall is premature without knowing the absolute profit figures and the scale of operations; Company Y could be generating higher absolute profits despite its lower margins due to its efficiency.

This question tests the application of duration to estimate a bond’s price sensitivity to a change in interest rates. The key is to first calculate the modified duration from the given Macaulay duration and yield, and then use it to estimate the percentage and dollar price change.

First, calculate the Modified Duration (D_mod):
The formula is D_mod = Macaulay Duration / (1 + YTM).
D_mod = 8.0 / (1 + 0.05) = 8.0 / 1.05 ≈ 7.619.
Therefore, statement I is correct.

Second, estimate the percentage price change (Δp/p):
The formula is Δp/p = -D_mod Δy.
The yield is expected to increase by 75 basis points, so Δy = +0.75% or +0.0075.
Δp/p = -7.619 0.0075 ≈ -0.05714 or -5.71%.
This means the estimated price decrease is approximately 5.71%.
Therefore, statement II is correct.

Third, calculate the estimated new price:
The dollar change (Δp) is the percentage change multiplied by the initial price.
Δp = -0.05714 $1,100 ≈ -$62.85.
The new price is the initial price plus the dollar change.
New Price = $1,100 – $62.85 = $1,037.15.
Therefore, statement III is correct.

Fourth, evaluate statement IV:
Duration measures the sensitivity of a bond’s price to interest rate changes. The relationship is inverse: when interest rates (yields) rise, bond prices fall. The statement claims the price will rise, which is fundamentally incorrect.
Therefore, statement IV is incorrect.

Based on the analysis, statements I, II, and III are correct. Therefore, statements I, II and III are correct.

This question assesses the candidate’s understanding of different listing methods under the Hong Kong Listing Rules and their primary purpose, specifically distinguishing between methods that raise new capital for the listing applicant and those that do not.

I. An Offer for Subscription is a primary offering where a company issues new shares to the public. The main purpose is to raise fresh capital for the company’s operations and growth. Therefore, this method involves raising new capital.

II. An Introduction is a method of listing where a company’s existing shares are listed without any marketing or offering of shares to raise new funds. This is suitable for companies that already have a wide shareholder base and do not need to raise capital upon listing. The company itself does not receive any new funds.

III. An Offer for Sale is a secondary offering where existing shareholders sell their shares to the public. The proceeds from the sale go to the selling shareholders, not to the company. Therefore, this method does not raise new capital for the company.

IV. A Rights Issue is an offer of new shares made to a company’s existing shareholders in proportion to their current holdings. This is a common method for already-listed companies to raise additional capital. Therefore, this method involves raising new capital.

The question asks for methods that do not involve raising fresh capital for the company. Both Introduction and Offer for Sale fit this description. Therefore, statements II and III are correct.

This question assesses the ability to calculate and interpret key financial ratios as required under the analysis of listed companies, a core competency for licensed individuals.

Statement I requires the calculation of the Weighted Average Number of Shares (WANS). The calculation is time-weighted:
– Shares from 1 July 2010 to 30 September 2010 (3 months): 200,000,000
– Shares from 1 October 2010 to 30 June 2011 (9 months): 200,000,000 + 35,000,000 = 235,000,000
– WANS = (200,000,000 × 3/12) + (235,000,000 × 9/12) = 50,000,000 + 176,250,000 = 226,250,000. Thus, statement I is correct.

Statement II requires the calculation of Basic Earnings Per Share (EPS), which is Net Profit divided by WANS.
– EPS = HKD 452,500,000 / 226,250,000 = HKD 2.00. Thus, statement II is correct.

Statement III requires the calculation of the Price-to-Earnings (P/E) ratio, which is the Current Market Price per Share divided by EPS.
– P/E Ratio = HKD 12.50 / HKD 2.00 = 6.25. Thus, statement III is correct.

Statement IV makes a qualitative judgment about the current ratio. While a healthy current ratio indicates good liquidity, an excessively high ratio can suggest inefficient use of assets, such as holding too much idle cash, poor collection of receivables, or obsolete inventory. It is not a ‘definitive’ signal of superior management. Therefore, statements I, II and III are correct.

The correct answer is top-down analysis. This approach begins with an examination of the overall economy and macroeconomic factors (the ‘top’). The analyst in the scenario starts by assessing broad indicators like regional GDP growth and central bank policies. From there, the analysis ‘drills down’ to identify specific industries that are likely to perform well within that macroeconomic environment. Finally, the focus narrows to selecting individual companies within those promising industries. This sequence, from macro to micro, is the defining characteristic of the top-down approach. Bottom-up analysis is the reverse process; it would start with identifying compelling individual companies based on their intrinsic merits (e.g., financial health, management quality) and then consider the industry and economic context. Fundamental analysis is a broad term that encompasses both top-down and bottom-up approaches, as it involves evaluating a security’s intrinsic value based on economic, financial, and other qualitative and quantitative factors; however, ‘top-down’ more precisely describes the specific methodology used. Technical analysis is incorrect as it focuses on forecasting price movements by studying past market data, primarily price and volume, rather than economic or corporate fundamentals.

The correct answer is Commercial Paper. Commercial paper is a short-term, unsecured promissory note issued directly by large corporations to fund their working capital. The term ‘unsecured’ is critical, as it means the debt is not backed by any collateral or third-party guarantee. Therefore, an investor in commercial paper is directly exposed to the credit risk of the issuing corporation; if the corporation defaults, the investor may lose their entire principal. In contrast, a Banker’s Acceptance, while initiated by a non-financial firm, is guaranteed by a bank. This guarantee transfers the primary credit risk from the corporation to the accepting bank, making it a much safer instrument. An Exchange Fund Bill is a debt instrument issued by the Hong Kong Monetary Authority on behalf of the HKSAR Government, meaning it carries sovereign credit risk, not corporate risk. A Negotiable Certificate of Deposit is issued by a bank and represents a deposit at that bank; its credit risk is tied to the issuing financial institution, not a non-financial corporation.

Statement I is correct. The ‘dirty price’ (also known as the full or invoice price) is the actual amount an investor pays to purchase a bond. It is calculated by adding the accrued interest to the ‘clean price’ (the quoted market price). Statement III is also correct. When a bond is traded between coupon payment dates, the seller has earned interest for the period they held the bond since the last coupon payment. The buyer, who will receive the full next coupon payment, must compensate the seller for this portion of the interest, which is known as accrued interest. Statement II is incorrect. The ‘clean price’ is the quoted price of the bond, which excludes accrued interest. The final invoice amount is the dirty price. Statement IV is incorrect. Accrued interest is calculated based on the number of days that have passed since the last coupon payment up to the settlement date, not the time remaining until the next payment. Therefore, statements I and III are correct.

The correct answer is a net profit of HKD 5 per share. For a long put option, the holder has the right, but not the obligation, to sell the underlying asset at the strike price. The net profit or loss is calculated by first determining the intrinsic value of the option at expiration and then subtracting the initial premium paid. The intrinsic value is the difference between the strike price and the market price of the stock, if positive (Strike Price – Stock Price). In this scenario, the intrinsic value is HKD 80 – HKD 72 = HKD 8. To find the net profit, the premium of HKD 3 must be subtracted from this intrinsic value: HKD 8 – HKD 3 = HKD 5 profit. A result of an HKD 8 profit incorrectly omits the cost of the premium. An HKD 3 loss represents the maximum loss the investor would incur, which only happens if the option expires worthless (i.e., the stock price is at or above HKD 80). An HKD 5 loss is a miscalculation and does not correctly reflect the profitable outcome of exercising an in-the-money option.

The correct answer is that Future Solutions Inc. has a higher degree of financial leverage as 60% of its assets are financed by debt, compared to 40% for Innovate Tech Ltd. The debt ratio is a key leverage ratio calculated as Total Liabilities divided by Total Assets. It measures the proportion of a company’s assets that are financed through debt. A higher ratio indicates greater financial leverage and, consequently, higher financial risk, as the company is more reliant on borrowing. For Innovate Tech Ltd., the debt ratio is HK$2,000,000 / HK$5,000,000 = 40%. For Future Solutions Inc., the debt ratio is HK$4,800,000 / HK$8,000,000 = 60%. Therefore, Future Solutions Inc. has a significantly higher proportion of its assets funded by debt. The statement that Innovate Tech Ltd. is more leveraged because it has fewer assets is incorrect; leverage is a relative measure, not an absolute one. The assertion that a larger asset base makes Future Solutions Inc. less risky is misleading, as its higher debt level relative to its assets increases its risk. The claim that both companies have similar risk profiles is factually incorrect, as the calculated debt ratios are distinctly different (40% vs. 60%).

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the agreement, the dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That higher price reflects the interest paid. Statement I is correct because a repo is economically equivalent to a secured or collateralized loan, where the securities act as collateral for the cash borrowed. Statement II is correct as the Hong Kong Monetary Authority (HKMA), like other central banks, uses repos and reverse repos as primary instruments for its open market operations to manage interbank liquidity and influence short-term interest rates. Statement III is correct because for the party lending the cash (i.e., buying the securities), the difference between the sale price and the pre-agreed higher repurchase price constitutes a fixed, predictable interest income. Statement IV is incorrect. While the collateral (in this case, highly liquid Exchange Fund Notes) significantly mitigates counterparty credit risk, it does not completely eliminate it. Residual risks, such as a sharp decline in the collateral’s market value or the counterparty’s default, still exist. Therefore, statements I, II and III are correct.

The Hong Kong Exchanges and Clearing Limited (HKEX) determines the closing price for eligible securities through the Closing Auction Session (CAS). The process involves a specific calculation method to ensure a fair and orderly market close. Statement I is incorrect; the closing price is not simply the last traded price before 16:00, which was the practice before the implementation of the CAS. Statement II is correct. During the final minute of the CAS (specifically, from 16:08:00 to 16:09:00, before the random closing), the system takes five snapshots of the nominal price at 15-second intervals. Statement III is also correct. The official closing price is the median of these five nominal prices derived from the snapshots. Using the median helps to mitigate price volatility from any single outlier trade at the very end of the session. Statement IV is incorrect. If fewer than five nominal prices are recorded, the system does not default to a simple average. The HKEX rules specify a different fallback mechanism, which typically involves using the last nominal price recorded. Therefore, statements II and III are correct.

The correct answer is the binomial option pricing model. This model is particularly well-suited for valuing American-style options because it evaluates the option’s value at discrete time steps, creating a ‘tree’ of possible future stock prices. At each step (or node) in the tree, the model explicitly checks whether it is more profitable to exercise the option early or to hold it for the next period. This capability is essential for American options on dividend-paying stocks, as the optimal strategy might involve exercising just before an ex-dividend date. The model’s backward induction process efficiently determines the option’s value by incorporating these optimal exercise decisions at every possible point in time before expiration. The Black-Scholes-Merton (BSM) model, even with adjustments for dividends, is fundamentally designed for European-style options which can only be exercised at maturity. Adjusting the stock price for the present value of dividends is a common workaround, but it does not accurately capture the value of the early exercise feature itself, which is a key component of an American option’s price. While the Monte Carlo simulation is a powerful and flexible method that can model numerous price paths, it is not the most direct or efficient tool for this specific problem. Accurately handling the early exercise decision within a Monte Carlo framework is complex and computationally intensive. The binomial model is the standard and more straightforward approach for standard American options. A risk-neutral valuation model based on implied volatility is a general description of the framework used in modern option pricing, not a specific computational model. Both the BSM and binomial models are forms of risk-neutral valuation that use volatility as an input. This answer is too broad and does not address the specific challenge of modeling the early exercise feature.

A down-trend line is a fundamental tool in technical analysis used to identify and confirm a bearish trend. Statement I is correct because a down-trend line is drawn by connecting at least two, but preferably more, successively lower peaks (or highs). Statement II is also correct; this line acts as a dynamic resistance level. As the price approaches the line from below, it often encounters selling pressure, causing it to retreat. Statement III accurately describes a key trading signal; a sustained and decisive price movement above the down-trend line is widely interpreted as a potential trend reversal, indicating that bearish momentum may be waning and a bullish phase could be starting. Statement IV is incorrect. A line connecting lower troughs (lows) in a downtrend would form the lower boundary of a downtrend channel and would represent a level of support, not the primary down-trend line itself, which connects the highs and represents resistance. Therefore, statements I, II and III are correct.

The correct answer is that the cancellation request will be rejected by the trading system. The Hong Kong Stock Exchange’s Pre-Opening Session is divided into four distinct sub-periods, each with specific rules. The initial order was placed at 9:10 AM, which falls within the Order Input Period (9:00-9:15), a time when orders can be entered, modified, or cancelled. However, the instruction to cancel was given at 9:17 AM, which is during the Pre-Order Matching Period (9:15-9:20). According to the trading rules of the Hong Kong Exchanges and Clearing Limited (HKEX), no modification or cancellation of any existing orders is permitted during this specific five-minute window. Therefore, the system will not accept the cancellation instruction. The suggestion that the cancellation would be accepted because matching has not occurred is incorrect as it ignores the specific rules of the Pre-Order Matching Period. The idea that the request would be queued for the continuous trading session is also false; the system rejects invalid instructions at the time they are entered, it does not hold them for a later session. Finally, the notion that the order can only be cancelled after the final Indicative Equilibrium Price (IEP) is determined is inaccurate, as no order activity is permitted during the subsequent Order Matching Period (9:20-9:28) either.

Statement I is correct. According to paragraph 17.4(c) of the Code of Conduct for Persons Licensed by or Registered with the SFC, a sponsor has a primary duty to be satisfied that the directors of the listing applicant understand their responsibilities and obligations under the Listing Rules. This is a fundamental aspect of ensuring good corporate governance from the outset. Statement II is incorrect. While a sponsor must conduct due diligence on the prospectus and have a reasonable basis for believing the information is accurate and complete, it does not provide an unconditional guarantee for financial forecasts. The primary responsibility for the accuracy of the prospectus content, including forecasts, rests with the directors of the listing applicant. The sponsor’s role is to exercise professional skepticism and due care. Statement III is incorrect. For a Main Board listing, the sponsor (or another firm) must act as the compliance adviser from the date of listing until the publication of financial results for the second full financial year after listing. The statement’s claim of ‘at least three full financial years’ is inaccurate. Statement IV is correct. As stipulated in paragraph 17.12 of the Code of Conduct, if a sponsor ceases to act for a listing applicant, it must inform the Hong Kong Stock Exchange (HKEx) in writing of the reasons for the cessation. This is a critical regulatory reporting requirement. Therefore, statements I and IV are correct.

The Listing Rules require a formal notice to be published in newspapers on the date a listing document is issued. This notice serves to inform the public about the offering and direct them to the full listing document. Statement I is correct because the notice must explicitly state that it is for informational purposes only and does not constitute an offer, ensuring investors understand they must rely on the full prospectus. Statement II is correct as the notice must provide practical information on where the public can access the detailed listing document. Statement IV is also correct; it is a mandatory disclosure that an application has been made to the Stock Exchange of Hong Kong (SEHK) for listing and permission to deal in the securities. Statement III is incorrect because the formal newspaper notice is a summary announcement. While the full listing document contains detailed financial information, the brief newspaper notice is not required to include the issuer’s complete audited financial statements for the past three years; doing so would be impractical for a newspaper advertisement. Therefore, statements I, II and IV are correct.

This question assesses the fundamental differences between forward contracts and option contracts, particularly in an over-the-counter (OTC) context. Statement I is correct because it captures the core distinction: a forward contract creates a binding legal obligation for both parties to transact at a future date at an agreed price, whereas an option provides the holder with the right, but not the obligation, to do so. The option holder can choose to let the option expire worthless if the market moves in their favor. Statement III is also correct. A primary feature of forward contracts, as they are traded OTC, is their customizability. Parties can tailor key terms like the notional amount, underlying asset, and maturity date to perfectly match a specific underlying exposure, which is a significant advantage for corporate hedging. Statement II is incorrect because forward contracts are, by definition, OTC instruments and are not standardized or traded on an exchange. While some options are exchange-traded, many are also traded OTC. Statement IV is incorrect as it reverses the cost structure. The buyer of an option pays an upfront, non-refundable premium to the seller for the right granted by the contract. Conversely, a forward contract typically does not involve an upfront premium payment, although collateral or margin may be required. Therefore, statements I and III are correct.

The correct answer is that the lack of direct control over individual investment decisions and the presence of ongoing management fees are inherent features of investing in a unit trust. When an investor buys into a unit trust or mutual fund, they are pooling their capital with other investors and delegating the day-to-day investment management to a professional fund manager. This structure means the individual investor relinquishes control over the selection and timing of buying or selling specific securities within the fund’s portfolio. The fund manager makes these decisions based on the fund’s stated investment objective. In return for this professional management, the fund charges regular fees, typically calculated as a percentage of the assets under management. These fees are a fundamental part of the product structure, compensating the manager for their expertise and covering administrative costs. Stating that the fund’s value is not guaranteed against market downturns describes general investment risk applicable to most securities, not a unique structural disadvantage of a unit trust. While poor performance is a risk, it is not an inherent characteristic in the same way as fees or lack of control. Claiming that all unit trusts impose a mandatory multi-year lock-in period is incorrect. Although they are generally considered long-term investment vehicles, most authorized unit trusts in Hong Kong are open-ended, allowing investors to redeem their units on a regular basis (often daily), providing liquidity. Strict lock-in periods are more common in other types of funds, such as private equity or certain hedge funds. Suggesting that capital gains from the fund are always subject to high local taxation is misleading, particularly in the context of Hong Kong. For authorized collective investment schemes in Hong Kong, profits derived from the disposal of securities are typically exempt from profits tax. This tax efficiency is often cited as a key advantage, not a disadvantage.

The correct answer is that the company’s weighting will be constrained by the Cap Factor to the maximum allowable percentage, despite the increase in its Freefloat-Adjusted Factor. Stock indices like the Hang Seng Index use a freefloat-adjusted and capped methodology to ensure they are representative of the investable market and are not overly dominated by a few large constituents. The Freefloat-Adjusted Factor (FAF) is first applied to the company’s total market capitalisation to calculate its investable market value. An increase in the FAF, as described in the scenario, would increase this value. This freefloat-adjusted market capitalisation is then used to determine the company’s potential weighting relative to all other constituents. However, the Cap Factor imposes a strict ceiling on any single stock’s final weighting. In this case, since the potential weighting (11%) exceeds the index’s maximum cap, the Cap Factor will be applied to reduce the company’s final weighting to that maximum limit. The other options are incorrect. The increased FAF does not directly result in a higher final weighting because the cap acts as an overriding constraint. The factors are not netted against each other; they are applied sequentially. Lastly, a breach of the cap limit does not nullify the FAF; the FAF is a necessary input to determine the pre-cap weighting.

The dividend yield is calculated as (Annual Dividend Per Share / Current Market Price Per Share) 100%.
For Innovate Tech Ltd., the dividend yield is (HKD 1.60 / HKD 80.00) 100% = 2.0%.
For Stability Holdings Corp., the dividend yield is (HKD 2.50 / HKD 50.00) 100% = 5.0%.
Statement I is correct because Stability Holdings’ yield of 5.0% is higher than Innovate Tech’s yield of 2.0%.
Statement II is correct because the dividend yield formula has the share price in the denominator. Therefore, if the share price increases while the dividend per share remains constant, the resulting dividend yield will decrease.
Statement III is incorrect. Dividend yield represents only the income component of an investment’s return. Total return also includes capital gains or losses from changes in the share price.
Statement IV is correct as Stability Holdings’ dividend per share (HKD 2.50) is higher than Innovate Tech’s (HKD 1.60). Therefore, statements I, II and IV are correct.

According to standard brokerage practices and the operational flow for trading on the Stock Exchange of Hong Kong (SEHK), a licensed representative must obtain and confirm several key pieces of information from a client before an order can be entered into the Automated Matching System (AMS/3). Statement I is correct because the client’s account number is essential for identifying the client and booking the trade to the correct account. Statement II is correct as the stock code and quantity are fundamental parameters of any trade order. Statement III is also correct because the representative needs to know the price at which the client is willing to transact, whether it’s a limit order or a market order. Statement IV is incorrect because the settlement date for trades executed on the SEHK is standardized under the rules of the Central Clearing and Settlement System (CCASS). The standard settlement cycle is two days after the transaction day (T+2). Clients cannot specify a preferred settlement date for on-exchange trades. Therefore, statements I, II and III are correct.

The correct answer is that the depositary bank will convert the JPY dividend into HKD and distribute it to him, along with providing all corporate action notices. For Hong Kong Depositary Receipts (HDRs), a depositary bank acts as a crucial intermediary. Its role is to facilitate the ownership and trading of foreign shares in the local market. When the foreign issuer (Kyoto Electronics) declares a dividend in its home currency (JPY), the depositary collects these payments. It then performs the necessary currency conversion into the currency in which the HDRs are traded, which is typically Hong Kong dollars (HKD), and distributes the net amount to the HDR holders like Mr. Chan. Furthermore, the depositary is responsible for transmitting all relevant corporate information, including notices of meetings and details of corporate actions, from the issuer to the investors. It is incorrect that the investor would receive the dividend in the original foreign currency and have to arrange conversion themselves; this negates the primary function of the depositary. The Stock Exchange of Hong Kong (SEHK) is the trading venue and does not handle the currency conversion and payment of dividends for individual securities; this is the responsibility of the depositary and the clearing system. It is also incorrect to suggest that the investor must independently monitor the issuer’s foreign announcements, as the depositary agreement includes the service of disseminating such crucial information to local HDR holders.

A share registrar is appointed by a listed company to manage its register of shareholders and related administrative tasks. Statement I is correct as distributing dividends is a primary function of a share registrar. Statement II is also correct because the registrar is responsible for maintaining the accuracy of the shareholder register, which includes processing share transfers and issuing new certificates. Statement III describes the role of a custodian, which is to hold and safeguard assets, not the role of a share registrar. Statement IV describes a core obligation of Hong Kong Exchanges and Clearing Limited (HKEx), which is to ensure the market operates in a fair and orderly manner. Therefore, statements I and II are correct.

The correct answer is that the contract is subject to a Mandatory Call Event and trading ceases immediately. A core feature of a Callable Bull/Bear Contract (CBBC) is the ‘knock-out’ or ‘stop-loss’ mechanism known as the Mandatory Call Event (MCE). For a bull contract, an MCE is triggered when the price of the underlying asset falls to or below the pre-specified call price at any point during its lifespan. In this scenario, the HSI spot level of 17,998 is below the call price of 18,000, triggering the MCE. The immediate consequence is the termination of the CBBC’s trading on the exchange. The investor may be entitled to a residual value, calculated based on the price movement after the MCE, but the contract itself is no longer tradable. The contract does not simply lose value and continue trading; the MCE is a terminal event. CBBCs are not margined products, so the concept of a margin call from the issuer is not applicable in this situation. Furthermore, there is no mechanism for a CBBC to automatically convert from a bull to a bear contract; they are distinct instruments issued separately.

The debt-to-equity ratio is a key financial metric used to assess a company’s financial leverage. It is calculated by dividing a company’s total liabilities by its shareholders’ equity. A higher ratio indicates that a company is financing a larger portion of its assets through debt, which can imply higher financial risk due to fixed interest and principal repayment obligations. In this scenario, Company A’s debt-to-equity ratio is HK$600 million / HK$1,200 million = 0.5. Company B’s ratio is HK$900 million / HK$600 million = 1.5. The correct answer is that Company B exhibits a higher degree of financial leverage and potentially greater financial risk than Company A. This is because its ratio of 1.5 is significantly higher than Company A’s 0.5, showing a much greater reliance on debt relative to its equity base. The statement that Company A relies more heavily on debt is factually incorrect based on the calculation. The assertion that a lower ratio signifies higher financial risk is a direct contradiction of the principle; a lower ratio generally indicates a more conservative capital structure and lower risk. The claim that both companies have identical financial risk is incorrect, as their leverage profiles, a critical component of financial risk, are substantially different.

A comprehensive industry analysis evaluates various factors that could impact the long-term profitability and viability of companies within that sector. The correct answer is that the rapid development of a new, more efficient battery technology by a major international competitor represents the most critical long-term threat. This is because technological obsolescence can render an entire industry’s products uncompetitive, fundamentally undermining its market position and future earnings potential. It is a structural threat that is difficult to mitigate without significant, and often prohibitive, new investment in research and development. In contrast, the other factors, while important, are generally less fundamental or more manageable. A short-term increase in local interest rates is a cyclical economic headwind that affects capital expenditure but does not invalidate the industry’s core technology or business model. The phasing out of a government subsidy will impact profitability and may slow growth, but a fundamentally sound industry should be able to operate without such support. Fluctuations in the supply chain for raw materials are a significant operational risk, but companies can often manage this through strategic sourcing, hedging, or developing alternative material inputs; it is a challenge to be managed rather than an existential threat like a disruptive new technology.

Statement I is correct. A bonus issue, also known as a scrip issue or capitalization issue, converts a company’s profits or reserves into new shares which are then distributed to existing shareholders for free, in proportion to their holdings. It does not raise any new cash for the company but rather capitalizes its reserves.

Statement II is correct. A rights issue is a direct offer to existing shareholders to purchase additional shares, usually at a discounted price compared to the market price. This is a common method for listed companies to raise new equity capital.

Statement III is correct. The market capitalization of a company should, in theory, remain the same immediately before and after a bonus issue. Since the number of shares in issue increases, the price per share must decrease to reflect this. This adjusted price is known as the theoretical ex-bonus price.

Statement IV is incorrect. In a rights issue, if a shareholder does not subscribe for the new shares they are entitled to, their percentage ownership in the company will be diluted. This is because new shares will be issued to other subscribing shareholders, increasing the total number of shares in issue and thus reducing the non-subscribing shareholder’s proportional stake. Therefore, statements I, II and III are correct.

The correct answer is that for a call warrant, a higher exercise price generally leads to a lower warrant price, whereas for a put warrant, a higher exercise price typically results in a higher warrant price. The exercise price is a fundamental component in determining a warrant’s value. For a call warrant, which gives the right to buy, a higher exercise price means the underlying asset’s price must increase by a larger amount to become profitable, making the warrant inherently less valuable. Conversely, for a put warrant, which gives the right to sell, a higher exercise price provides a more favorable selling price for the holder, thus increasing the warrant’s value. The assertion that a higher exercise price increases the value of both warrant types is incorrect as it ignores the fundamental difference between call and put options. The opposite statement, suggesting a higher exercise price increases a call’s value and decreases a put’s value, is a direct reversal of the correct principle. Finally, while volatility and time to expiry are critical factors in a warrant’s price (extrinsic value), it is incorrect to state that the exercise price has no impact; it is a key determinant of the warrant’s intrinsic value.