Bear Stearns could initiate privately negotiated transactions with institutions by (1) taking positions in dollar or Hong Kong currency forward contracts, (2) taking positions in dollar or Hong Kong currency spot contracts, or (3) arranging currency swap agreements.
The Hong Kong warrants represent another exchange-traded derivatives that allow U.S. investors to hedge or speculate on the price movements in the Hong Kong stock market. Understanding the pricing behavior of this new security will definitely provide valuable information to investors as well as issuers in assessing their potential benefits and costs.
As Hong Kong warrants are exchanged-traded options on a HK$- denominated stock index, the valuation of these securities is dependent upon a complex set of factors. We extend Dravid, Richardson and Sun's  European dollar-denominated option model to allow for early exercise based on Barone- Adesi and Whaley's  approach. The empirical results reveal that the Barone- Adesi and Whaley's model seems to be very effective in pricing Hong Kong warrants when the implied volatility is employed.
K. C. Chen is Theodore F. Brix Professor of Finance at California State University, Fresno.
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