One instrument that has not wreaked havoc on that scale and so remains relatively obscure is the warrant, which is yet to be universally understood.

So what is a warrant? It is a bit like an option. A warrant gives investors the option to buy or sell a particular asset in the future. The asset can be commodities, currencies, an equity index or just simple equities.

For equities, a 'call warrant' gives the holder the right to buy shares and a 'put warrant' gives the holder the right to sell shares.

The particular share the warrant is linked to is called the 'underlying security'. So if you buy China Mobile call warrants, you own the right to buy China Mobile shares. The price at which you can buy those shares is fixed and is called the strike price, and the date on which you exercise that right is called the maturity date.

So a China Mobile call warrant with a strike price of HK$100 and a maturity date of June 1 would entitle the holder to buy a China Mobile share for HK$100 on the maturity date. A put warrant would entitle the holder to sell it for HK$100. Let us assume one warrant confers the right to buy or sell one China Mobile share.

In addition to the strike price, the China Mobile warrant will itself have a price. When the warrant is issued, investors buy them at the issue price. Investors can then buy and sell warrants at their market price.

If the issue price or market price of our imaginary China Mobile call warrant is HK$10, for HK$10 you purchase the right to buy one China Mobile share for HK$100 on June 1.

You do not actually have to buy the China Mobile share, you simply have the option to do so.

Although the best way to understand warrants is to think of them in terms of the right to buy or sell shares, you are unlikely to ever actually do so. At the end of the contract, the issuer of the warrant will just work out the profit you would make if you did actually buy and then sell the shares, and pay you that amount.

If you would have made a loss from the theoretical purchase and sale, the issuer pays you zero, and you do not owe the issuer any money.

So although your upside is unlimited, your downside is capped.

So, let's assume you buy China Mobile call warrants for HK$10 each and keep them until they mature on June 1. Three things can happen: the price of China Mobile on the maturity date is more than the strike price, less than the strike price or the same as the strike price.

Table 1 illustrates the outcome for these three scenarios. You will notice that for the same size of investment, the percentage profit on the cost of the warrant can be much more than the percentage profit an investor would make on a simple purchase of shares. And so can be the losses.

This is because of leverage. An investor gets exposure to an underlying security but only pays a fraction of its price. It would have cost HK$100 to buy a China Mobile share to get exposure to its risk and returns.

But an investor buys a warrant for only HK$10 and gets exposure to the same risk and returns.

So, if you hold a warrant that entitles you to buy China Mobile shares for HK$100, and China Mobile shares are trading at HK$110 on maturity, each warrant is worth HK$10, in this case its break-even point.

But if China Mobile shares are trading at HK$120, the warrants are worth HK$20. Thanks to the leverage, a 9 per cent difference in the share price translates into a 100 per cent difference in the value of this warrant on maturity. This sounds fantastic, but remember it works the same in the opposite direction. If shares are trading at HK$100 at maturity rather than HK$110, the warrants go from being worth HK$10 to being worth zero.

In the same way the value of a call warrant benefits from increases in the price of the underlying security, the value of a put warrant benefits from decreases in the price of the underlying security. This is because on the theoretical maturity of a put warrant, if you can sell shares to the issuer at a price higher than the market price, you will make a profit.

On maturity there is a direct relationship between the price of the underlying security and the value of the option. But many investors do not hold on to warrants until their maturity. Instead they buy and sell them, hoping to take advantage of changes in the market price.

The market price of a warrant is pretty complicated and is influenced by a long list of factors such as its volatility, the time until its maturity, and of course the price of the underlying security. Because of this extra complexity, as well as the general vagaries and uncertainty of the markets, the market price of a warrant will not exactly track the market price of the underlying security.

Say you think China Mobile is going to rise. But instead of just buying China Mobile shares for HK$110 each, you buy our imaginary China Mobile call warrants for HK$10 each. If after one month China Mobile rises from HK$110 to HK$120, the China Mobile call warrants are unlikely to also rise by HK$10. If we suppose they rise by HK$5, you will still have made a 50 per cent return while a shareholder will have made only 9 per cent.

But of course, if China Mobile shares drop HK$10, and the warrant drops by only HK$5, you have leveraged your losses too. The stockholder would have lost 9 per cent but you would have lost 50 per cent. There lies the attraction, and the risk.

One other thing. If you look at actual warrants, there are no China Mobile call warrants priced anything like HK$10. They are at values like 11 HK cents or 6 HK cents.

This is because one warrant generally entitles the holder to less than one underlying security.

Warrants have what is called an entitlement ratio and this is usually 10 or 100. If the warrant is priced at 11 cents and has an entitlement ratio of 100, it means you would need to buy 100 warrants at a total price of HK$11 to have the right to buy or sell just one underlying security. Our imaginary call warrants have an entitlement ratio of 1, which despite its simplicity, is pretty unusual. So where can I buy this volatile instrument, this complex financial derivative that exposes me to leveraged returns and leveraged risks?

Surprisingly, on the internet. Just log on to whatever account you use to buy shares and you can buy warrants instead. But think carefully first.

As with any simple explanation of something complex, there are a bunch of things I left out, such as terms like delta, theta, vega and moneyness, and, no, I am not making these up. While it is true that I have only scratched the surface of this very complex product, at least one thing should be clear: warrants increase potential returns as well as risk.

But unlike the other structured products we have discussed before, investors' downside on a warrant is capped at the purchase price of the warrants. You cannot lose any more than the amount you put in. The upside, on the other hand, is theoretically unlimited. Then again, risks are as magnified as returns.

Now it is up to you to decide if it warrants an investment.