Taiwan Stock Exchange Corporation

Primary market: During the sales period prior to a warrant’s listing, an investor may register for subscription to a warrant issuer.

Secondary market: After a warrant is listed, the investor may use the existing account to trade; nevertheless, in order to ensure the investor’s comprehensive understanding of risks thereof, the investor shall fill out the risk disclosure statement while engaging in the first trade.

Call/Put warrants grant a holder the right to purchase/sell a certain amount of specific stocks from/to the issuer using the agreed exercise price, or collect the price difference while adopting cash settlement, within a specific period (American) or on the maturity date (European). Investors making bullish bets will buy call warrants, and vice versa.

1. Codes of call warrants are made up of six-digit numbers and numbered from 030001 to 089999.
2. Codes of put warrants are made up of five-digit numbers plus the English letter P, U or T and numbered from 03001P to 08999P, 03001U to 08999U and 03001T to 08999T.
3. Codes of call warrants with indices or securities of foreign exchanges as underlying instruments are made up of five-digit numbers plus the English letter F and numbered from 03001F to 08999F.
4. Codes of put warrants with indices or securities of foreign exchanges as underlying instruments are made up of five-digit numbers plus the English letter Q and numbered from 03001Q to 08999Q.
5. Codes of callable bull contracts are made up of five-digit numbers plus the English letter C and numbered from 03001C to 08999C.
6. Codes of callable bear contracts are made up of five-digit numbers plus the English letter B and numbered from 03001B to 08999B.
7. Codes of extendible callable bull contracts are made up of five-digit numbers plus the English letter X and numbered from 03001X to 08999X.
8. Codes of extendible callable bear contracts are made up of five-digit numbers plus the English letter Y and numbered from 03001Y to 08999Y.

Because underlying instruments of such warrants are foreign securities or indices, trades and exercise thereof are different from those of general warrants with domestic underlying instruments. For instance, such warrants are traded without fluctuation limits, only European warrants settled in cash are allowed to be issued, and the liquidity provider will not provide quotes when foreign securities exchanges are closed or at market recess. Furthermore, because the exercise price is denominated at the original currency, the exercise price must be multiplied by the mid-price of the Bank of Taiwan spot exchange rate on the given day first and then the exercise value will be calculated when it is exercised upon maturity. Therefore, investors shall refer to the prospectus of such warrants for the details before making investments.

Trading warrants are like trading stocks. The investor is required to pay a fee while buying warrants and pay a transaction tax (trading price x 0.1%) in addition to the aforementioned fee while selling warrants.

If the underlying security goes ex-rights/ex-dividend, the stock price will be adjusted, and the exercise prices and exercise ratios of warrants will be adjusted according to the formula stated in the listing announcements and prospectuses of all issuers.

The exercise ratios of warrants represent the number of shares of underlying instruments allowed to be bought by using one unit of warrants. I.e. if the exercise ratio is 1:0.5, it represents that one unit of warrants grants a right to buy 0.5 shares of the underlying instrument. According to the exercise formula of call warrants, Exercise amount = (Settlement price - Exercise price) x No. of warrants x Exercise ratio - Fee - Securities transaction tax. Thus, different exercise ratios will affect the exercise amount.

1. Delivery of securities.
2. Cash settlement.
3. Delivery of securities, but the issuer has the right to choose cash settlement.
4. Delivery of securities, but the investor has the right to choose cash settlement.
5. Delivery of securities, but the issuer may choose cash settlement：If the warrant holder fails to apply for exercise when a warrant has exercise value upon maturity, the issuer may automatically exercise cash settlement based on the simple arithmetic mean trade price of the underlying securities during the 60 minutes prior to market close on the warrant's maturity date.
6. Delivery of securities：If the warrant holder fails to apply for exercise when a warrant has exercise value upon maturity, the issuer may automatically exercise cash settlement based on the simple arithmetic mean trade price of the underlying securities during the 60 minutes prior to market close on the warrant's maturity date.
7. Delivery of securities, but the investor may choose cash settlement：If the warrant holder fails to apply for exercise when a warrant has exercise value upon maturity, the issuer may automatically exercise cash settlement based on the simple arithmetic mean trade prices of the underlying securities during the 60 minutes prior to market close on the warrant’ s maturity date.

1. Request method: The holder shall first fill out an "Application Form for the Exercise of Call (Put) Warrants” and affix the personal chop thereto, and commission the securities firm to file an exercise application to the TWSE, as well as make an advance payment required for exercise to the securities firm. If the issuer chooses cash settlement, the commissioned securities broker shall refund the advance payment on the first business day subsequent to the request for exercise.
2. Request time: The exercise request time shall be before 02:30 P.M. any business day within the duration.
3. Request quantity: Shall be warrants in 1,000 units or an integer multiple thereof.
4. A warrant holder may not request to exercise the call (put) warrants until the second business day after the date on which they are purchased, and after it has been confirmed that such call (put) warrants have been transferred into a central securities depository account.
5. Exercise fee: A warrant holder requesting for exercise is subject to the following fees
   1. Fees:
      Delivery of securities：Fees are calculated based on “Exercise price x Quantity of underlying securities.”
      Cash settlement：Fees are calculated based on the “Difference between the exercise price and the underlying security’s price x Quantity of underlying securities.”
   2. Transaction tax:
      When the issuer chooses cash settlement, the call (put) warrants holder must calculate transaction taxes based on the “Difference between the exercise price and the underlying security’s price x Quantity of underlying securities” with a 0.1% transaction tax rate.

When an in-the-money warrant is at maturity and the holder does not apply for exercise, the issuer will automatically exercise cash settlement and allocate funds to the warrants holder two business days following the maturity date.

Please see details about warrants exercise methods in Q2. Except for call (put) warrants with the exercise method being cash settlement, the exercise of which will be conducted by the TWSE automatically upon maturity, the warrant holder shall pay attention to other exercise methods, and whether the issuer states that “If a warrants holder fails to apply for exercise in a timely manner when a warrant has exercise value upon maturity, the issuer may automatically exercise cash settlement of in-the-money warrants upon maturity based on the simple arithmetic mean trade price of the underlying securities during the 60 minutes prior to market close or automatically exercise cash settlement of settlement index on the warrant's maturity date.”
If cases where the issuer does not specifically state that automatic cash settlement will be adopted for in-the-money warrants upon maturity, the warrant holder will lose the right to request for exercise after the warrant matures, i.e. the issuer will not be obligated to exercise the payment. Investors shall always pay attention to the exercise deadline.

When prices of underlying securities go up, the prices of warrants should rise theoretically. However, under certain circumstances, the prices of warrants do not rise simultaneously. For instance, when prices of underlying securities are still far from the exercise prices and warrants are approaching the maturity dates, because the probability of underlying securities exceeding the exercise prices is lower, the linkage between the prices of warrants and the prices of underlying securities reduces. As a warrant approaches the maturity date, its price could even fall when the price of an underlying security goes up due to the accelerating decrease of time value. In some cases that when investors possess a bullish view toward certain underlying security, their large bid orders of warrants may pull up warrants’ prices that such prices they pay for the warrants may be much higher than the reasonable quote offered by the liquidity provider. Thus when the prices of the underlying instruments go back on track, investors who paid for deviated high prices will feel quotes offered by the liquidity provider are relatively low and do not rise jointly along with the rising price of underlying securities.

The daily fluctuation percentage of a warrant price is calculated based on the price increase/decrease of its underlying security. The existing fluctuation percentage of the price of the underlying security is calculated based on the closing price of the previous day multiplied by the fluctuation percentage, while the fluctuation percentage of warrant prices are calculated based on the fluctuation amount of the underlying security multiplied by the warrant’s exercise ratio. Therefore, when warrants undergo a larger price fluctuation, the investors are likely to earn a return rate in high multiples. Nevertheless, investors must also notice that when the price of an underlying security does not move in the expected direction, the percentage of decrease of warrant prices will be enlarged in multiples, thereby resulting in expanded losses.

The value of warrants includes an intrinsic value and a time value. The notable feature of investments in warrants is that the investor hopes to use time in exchange for profits brought by the price volatility of underlying securities. Warrants with approaching maturity dates do not have sufficient time to wait for a market overturn, and so the probability of profit making is relatively low. Furthermore, the time value of warrants also decreases faster as maturity dates draw closer.

When warrants almost hit maturity dates, the time value will approach zero. In the case of in-the-money warrants, if the market liquidity is insufficient, investors may directly apply for exercise of American warrants. If the market liquidity is sound, the investor may directly sell warrants on the market. As for out-the-money warrants, because they may not possess the exercise value before maturity, investors are recommended to directly sell warrants on the market.

Regardless of in-the-money warrants or out-the-money warrants, securities firms are not obligated to recall warrants circulating on the market. Therefore, investors must pay attention to out-the-money warrants with approaching maturity dates because they may not possess the exercise value. Investors are recommended to sell warrants on the market earlier.

Upon the issuance of any warrants, the issuers will state in the prospectus the measures to be adopted when the warrants are delisted as a result of merger or delisting of the underlying securities. When such factors occur, warrants must mature earlier; or when the closing prices of underlying securities reach cap/floor prices of CBBCs, such warrants will become mature earlier. Investors can obtain relevant information on the Market Observation Post System.

Securities firms issue warrants as an investment instrument to investors. Furthermore, warrant issuers will hedge based on the theoretical model, so investors’ profit/loss is not directly linked with the issuers. Investors may take gains or suffer losses as a result of price increases or decreases of underlying securities, and issuers may take gains or suffer losses as a result of volatility or liquidity risk of underlying securities. Thus, securities firms do not necessarily issue warrants because they make bullish or bearish bets on such underlying securities.

CBBCs are designed with a maturity date and cap/floor price. Before the maturity date, if the closing price of the underlying security touches the cap/floor price, the CBBC will become mature earlier and be ended for listing, and investors can collect the cash balance (i.e. residual value of warrants).

Liquidity providers follow the rules to offer bid and ask quotes of warrants to the market; nevertheless, liquidity providers do not offer quotes at the following timings:

1. Within five minutes after market opens.
2. Underlying securities of warrants are suspended from trading.
3. When the quantity of warrants in the liquidity provider’s account cannot satisfy the minimum put unit per quote, the liquidity provider may only submit bid quotes.
4. Other timings set by issuers at its discretion, which are exemplified as below:
   1. When the price of an underlying security hits the limit-up price, liquidity providers may only submit bid (ask) quote for call (put) warrants; when the price of an underlying security hits the limit-down price, liquidity providers may only submit the ask (bid) quote for call (put) warrants; when the price of warrants hits the limit-up (down) price, liquidity providers may only submit the bid (ask) quote.
   2. When in-the-money degree of a warrant reaches 30% or more, liquidity providers may only submit the bid quote for the warrant.
   3. Warrants with a theoretical value of NT$0.01 or less.
   4. When a technical issue arises from liquidity providers’ daily operations.
   5. When issuers cannot hedge their warrant positions.
   6. For individual stock warrants, electronic index warrants or financial index warrants, when the 20-day historical volatility rate of underlying instruments exceeds the implied volatility rate of the best bid order of warrants by 5%, or when the volatility index (VIX) of TAIEX options exceeds the implied volatility rate of the best bid order of TAIEX warrants by 3%, no ask quotes may be offered.

When the market undergoes drastic volatility, some liquidity providers may offer quotes with greater bid-and-ask spreads. Such condition is a reflection of their hedging cost, or their unwillingness to sell warrants because of the difficulty in hedging. If it has been found that there is an excessive bid-and-ask spread and small order amount when liquidity provider offers quotes, chances are investors are not able to earn the price difference after buying or selling warrants. Investors shall compare the quoting quality of different liquidity providers before investing in warrants, and choose warrants with smaller bid-and-ask spreads and larger order amounts as their investment targets.

The liquidity providers’ adjustments of quote volatility rates will affect quotes on warrants. If any intentional adjustment results in prejudicing the fairness of such warrant’s price and causing losses to warrant holders, the TWSE will make dispositions according to relevant rules. Moreover, investors are advised to select warrants with liquidity providers who offer stable quotes prudently, so as to avoid choosing warrants with unstable quotes.

According to TWSE rules, liquidity providers shall quote voluntarily at least every five minutes, and the quotes shall be maintained for at least 30 seconds. Provided that, liquidity providers shall not be subject to the 30-second restriction if the quotes are updated in response to the underlying security's price change; ie, when the underlying security's price changes, the liquidity provider may change its warrants’ quotes accordingly. In addition, when the market undergoes drastic movements, liquidity providers may extend the interval of two quotes in order to mitigate their hedging risk.

When the market volatility intensifies, liquidity providers recall warrants instead of buying more underlying securities to hedge the increasing risk. Thus, they will increase the quantity of bid orders and cut the quantity of ask orders significantly. Nevertheless, the quantity of ask orders may not be less than 10,000 shares.

Investors can measure the quality of liquidity providers by examining the implied volatility rate of warrants, including the implied volatility of the best bid (ask) order on the spot, the average implied volatility of the best bid (ask) order for a period of time, and the fluctuation of the implied volatility of the best bid (ask) order during a period of time. We compare the degree of volatility rate and stability of volatility offered by different liquidity providers. Furthermore, the liquidity of warrants could be measured by bid-and-ask spread, price difference ratio [= (bid-ask)/ask] and quantity of bid (ask) orders. Investors shall choose warrants with smaller bid-and-ask spread, a larger order amount, and stable volatility, as the investment target.

“Warrants Information Disclosure” (website: http://warrants.sfi.org.tw/） was launched on July 1, 2012. Such a platform offers the information of quotes made by warrant liquidity providers based on various aspects and supporting integrated functions. It discloses a warrant’s profile, implied volatility, liquidity and closing volatility after the market closes on a daily basis. The profile of which contains the warrant code, warrant name, no. of days to the maturity date, degree of in(out)-the-money and exercise ratio. The implied volatility allows investors to objectively compare market making prices offered by liquidity providers based on the same benchmark; the liquidity deeply affects investor’s trading cost. Warrants with better liquidity make it easier for investors to trade on the market because the cost between bid and ask orders is relatively smaller. The closing volatility information allows investors to observe the degree of deviation between the market price and the quote (usually the fair price) offered by the liquidity provider. Investors can make use of such platform’s information when selecting investment targets.

The code of general CBBCs is different from that of extendible CBBCs. The code of extendible callable bull contract is made up of 5-digit number plus the English letter X (6-digit). The code of extendible callable bear contract is made up of 5-digit number plus the English letter Y (6-digit).

An issuer of the extendible CBBCs shall apply for an extension twenty business days before the maturity date; investors may pay attention to the announcement during such period or make inquiries on the Market Observation Post System.

The issuer must state the financial expense rate for the current term upon issuance and application for extension. The financial expense rate for the current term remains fixed and unchanged, but the issuer may make adjustments based on its own cost of funds at the next extension.

The price of extendible CBBCs remains unchanged upon extension; instead, the exercise price is adjusted higher to reflect the finance-related expenses for the next year. For example, the exercise price of extendible CBBCs at the end of first term is NT$20. When such CBBCs are extended, the exercise price of the next term is adjusted higher from NT$20 to NT$20.5, which is equivalent to deducting the finance-related expenses for the next term from the original exercise value in advance. Therefore, investors can hold extendible CBBCs in the long run without engaging in complicated procedures, such as the addition of any delivery expenses.

Like general CBBCs, extendible CBBCs are designed with an automatic stop-loss mechanism. If the closing price of the underlying security touches the cap/floor price, the CBBC contract will automatically mature and conduct settlement. Investors can only collect the residual price while losing the residual financial expenses. Furthermore, although the leverage multiple of extendible CBBCs is lower than other warrants, it is still higher than that of securities spots. Thus, investors must assess their own risk appetite before making investments.

Underlying instruments linked by extendible CBBCs are normally indices and individual stocks with higher yields and deep in-the-money upon issuance. Thus, the probability of them touching the cap/floor price and becoming delisted earlier is relatively low, thereby making them suitable for mid-to-long-term investments. Before buying extendible CBBCs, investors must notice whether the in-the-money degree meets the investors' expectations of market movements.