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Useful alternative to passion for gambling

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Hong Kong investors are natural born gamblers. First reaction to any stock tip is likely to be: where can I buy the warrants? Equity derivative activity has grown massively out of such chutzpah.

Yet, despite this famed appetite for risk, faddish enthusiasm for new products is rare. Reflecting the Hong Kong business culture, investors know what they do best and tend to stick with it. Perhaps for this reason only two types of equity derivatives have ever properly caught on.

Hang Seng Index futures and covered call warrants on local stocks are popular, fantastically liquid and easily understood. By contrast attempts to introduce other products have met with varying degrees of failure.

Now, the stock and futures exchanges are launching stock options and futures on two red-chip companies in the light of huge turnover and price volatility. A market that spreads risk around is a safer market being the reasoning.

That this argument goes largely unchallenged - outcry greeted the launch of stock futures two years ago - is testament to Hong Kong's financial sophistication. It also reflects the less than intimidating record of stock futures and options since their launch.

The latest products come as red-chip activity dominates investor attention. Trading in China-backed companies has approached that of blue chips in recent months. Market appetite has been revved up by a host of individual stock and basket warrant issues.

By launching derivatives on China Resources Enterprise and Shanghai Industrial Holdings the two exchanges hopes to tap the huge liquidity in red chips. Investors who want leveraged exposure can buy either product - those wanting to short the stock will be likely sellers of futures.

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