Suppose that theHang Seng Index (HSI)is currently at20,176.7, themarketprice of theputwarrant on theHSIis $0.097, the hedge ratio is-0.240, the strike price is17,000and conversion ratio is7,300.The number of shares of warrants per lot is 10,000.

a.Find the warrant premiumandinterpret your answer.

b. Assume that you just purchased the put warrant on HSI at the current market price. If the HSI falls to 19,975 in a month, what is your profit or loss from holding one lot of the put warrant? Explain your answer using the effective gearing ratio.