English HKSI Paper 9 Topic 1

The wording of the question is actually not the most accurate. Arbitrageurs usually hold opposite positions, but this is the best answer among the existing answers.

Stock options adopt DCASS as a settlement system.

Novation is the process whereby the clearing house undertakes the credit risk and acts as the counterparty of both buyer and seller. Only the exchange-traded market has this kind of arrangement. There is no clearing house used generally in foreign market, OTC market and fund-raising market. Thus, there is no novation.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another.

Financial markets are broadly categorized as being either exchange-traded or OTC.

Exchange-traded markets are those that operate via a centralized exchange, so it has higher liquidity and resilience. “Novation” operates and guarantee every transaction effectively, the credit risk is therefore lowered.

The secondary market is where all subsequent trading takes place so the primary market relies on the existence of a liquid secondary market. Therefore, option C is incorrect.

The OTC foreign exchange and derivatives are traded on OTC markets.

The global foreign exchange market is the biggest such market, and operates globally via a network of telephones and computer screens.

A system of “novation” operates in exchange-traded markets, whereby the exchange clearing house effectively guarantees every transaction. The credit risk is therefore lowered.

A system of “novation” operates in exchange-traded markets, whereby the exchange clearing house effectively guarantees every transaction.

Debt securities with a maturity of up to one year are money market securities.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another.

Un-limitation of other markets increases the investments opportunities of arbitragers. It is because they can have more chance for taking risk-free advantage of countervailing prices in different markets.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another.

Buying Hang Seng Index components and then short selling it at the same time to obtain risk free profit is generally called arbitrage.

Stock futures are listed on HKFE.

Put options are agreements that give the buyer the right, but not the obligation, to sell an asset as the strike price on or some time before the expiry date.

Exporters may receive foreign currency payments, while importers may make them, and corporations may attempt to remove risk from these exposures by buying or selling currency in advance of payment. This form of active exposure management is referred to as hedging.

Derivatives are financial instruments that derive their value from that of an underlying asset or financial instrument.

The functions of derivatives: (1) risk management (i.e. hedging exposures). (2) speculation (i.e. taking profit from price movements). (3) arbitrage (i.e. buying or selling an asset in one market and immediately transacting an opposite trade of an equal amount of the same asset in a different market, in order to capture a risk-free profit).

Derivatives will not distribute dividends.

A forward contract, which is traded OTC, is an agreement in which two parties agree to the purchase and sale of an asset at some future time under such conditions as they agree.

HKFE is responsible for the operation of the futures exchange in Hong Kong, which involves various derivatives products (except for the stock options market, which is run by the SEHK, and settled through The SEHK Options Clearing House Limited).

A futures contract is an agreement to buy or sell an underlying asset at a specified price and date in the future. Futures contracts are exchange-traded and therefore have standardized features.

A forward contract is an agreement in which two parties agree to the purchase and sale of an asset at some future time under such conditions as they agree. In contrast to futures contracts, forward contracts are traded OTC, and their terms are not standardized.

A swap is an agreement between two parties to exchange (or swap) the financial obligations – or income stream-C – they derive from a portfolio of assets or liabilities.

Options are agreements that give the buyer the right, but not the obligation, to buy or sell an asset at a specified price (referred to as the strike price) on or some time before (depending on the style of option) a specified date (also referred to as the expiry date).

In summary, the functions of derivatives can be classified as: risk management (i.e. hedging exposures). Speculation (i.e. taking profit from price movements). Arbitrage (i.e. buying or selling an asset in one market and immediately transacting an opposite trade of an equal amount of the same asset in a different market, in order to capture a risk-free profit).

OTC volume dominates the derivatives market. Such contracts are tailor-made to the requirements of the parties involved. The transactions are arranged by phone and computer networks and not through a centralized marketplace. Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

All futures are traded in the exchange. Agreements and swaps etc are generally referred to over-the-counter derivatives.

Mr. Liao sold call option under the situation of having positions, which is one kind of covered strategy. Receiving limited premium and abandoning the potential upside gain of the stocks is a strategy of locking profit. If the stock price of Penguin company increases, Mr. Liao only has limited profits of the premium. On the other hand, if the stock price of the Penguin company decreases, though having losses, it can cushion some of the losses since he received some premium. It is kind of hedging as well.

Derivatives include futures, forwards, swaps and options (or a combination of one or more of these categories). Equity warrants are classified as equity securities.

“Swaptions” are effectively a mixture of swaps and options.

To hedge current market positions, one must take an opposite position in the derivatives market.

To hedge futures market positions, one must take an identical position to the current market position in the derivatives market?

Leverage of derivatives allow investors to use only part of the transaction amount to buy and sell, expanding the profit and loss potential.

Trading on HKFE became fully automated with the implementation, in June 2000, of the Hong Kong Futures Automated Trading System (“HKATS”).

Once a transaction takes place and is registered with HKCC, the contract between buyer and seller is novated and two new contracts are created: one between the buyer and HKCC and another between the seller and HKCC.

Novation: the futures contract between buyer and seller is novated, and replaced by two individual contracts between the buyer and HKCC and the seller and HKCC.

HKFE Clearing Corporation (HKCC) clear and settle the trading by DCASS.

Participants in the derivatives market include borrowers and lenders of the underlying assets who use derivatives transactions for hedging, speculative or arbitrage purposes.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another.

The derivatives market plays a zero sum game. The buyer and seller take two opposing views on the future direction of the price of the underlying asset. One side of the transaction will be right, and gain on the derivatives transaction, and therefore the other side must lose. Thus, return from derivatives is not constant.

The derivatives market plays a zero sum game. The buyer and seller take two opposing views on the future direction of the price of the underlying asset. One side of the transaction will be right, and gain on the derivatives transaction, and therefore the other side must lose.

Derivatives are fundamentally classified into four basic types: futures; forwards; swaps ; options.

Futures contracts are exchange-traded and therefore have standardized features. In contrast to futures contracts, forward contracts are traded OTC, and their terms are not standardized.

A forward contract is not transferable and there is no margin or collateral requirement to assure performance of the contract. Thus, there is counterparty risk.

Generally, the exchange acts as the counterparty to both the buyer and the seller for settlement and clearance. Thus, counterparty risk is eliminated, which means that investors need not worry that the other side of the transaction might default. Since forward contracts are traded OTC, the counterparty risk is higher.

Forward contracts are kind of OTC derivatives. The contractual arrangement is made directly between the buyer and seller and the trade have customized features. Thus, the volumes of forward contracts are lower than that of futures contracts which are exchange-traded derivatives.

Exchange-traded derivatives have standardized features such as size per contract, exercise price and time to maturity. Generally, the exchange acts as the counterparty to both the buyer and the seller for settlement and clearance. Thus, counterparty risk is eliminated, which means that investors need not worry that the other side of the transaction might default. Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

Derivatives are fundamentally classified into four basic types: futures; forwards; swaps ; options.

A futures contract are exchange-traded and it is an agreement to buy or sell an underlying asset at a specified price and date in the future.

Commercial papers are kind of short-term debt securities.

Derivatives are classified as either exchange-traded or OTC.

Derivatives are financial instruments that derive their value from that of an underlying asset or financial instrument. Derivatives are classified as either commodity derivatives and financial derivatives.

HKFE Clearing Corporation Limited (“HKCC”) provides the clearing and settlement function via the Derivatives Clearing and Settlement System (“DCASS”)9, which is an integrated system for derivatives markets covering futures and options. HKCC acts as the counterparty to both sides of every trade and its function is to guarantee settlement of all contracts. Once a transaction takes place and is registered with HKCC, the contract between buyer and seller is novated and two new contracts are created: one between the buyer and HKCC and another between the seller and HKCC. In this way, HKCC acts as the buyer to the seller and the seller to the buyer.

OTC derivatives traded in Hong Kong consist predominantly of FX instruments such as currency swaps, forwards, interest rate swaps and FRAs.

Contracts traded on HKFE can be classified as: (1) equity derivatives; (2) index derivatives; (3) interest rate (or debt) derivatives; (4) commodity derivatives

Derivatives are classified as either:
(1) Commodity derivatives: these are based on physical commodities. Examples of commodity derivatives are gold futures and options, which derive their value from that of gold in the gold market.
(2) Financial derivatives: these are based on financial instruments. Examples of financial derivatives are: share (stock) and bond futures and options, interest rate futures and options and currency futures and options.

Exchange-traded derivatives have standardized features and they are traded in collective market. Generally, the exchange acts as the counterparty to both the buyer and the seller for settlement and clearance.

Arbitrage means the ability to exploit price differences between various markets and securities and make risk-free profits at more or less the same time. Since there is time zone difference between Hong Kong stock market and American stock market, Mr. Liao can’t make the arbitrage trading.

One month HIBOR future is a kind of interest rate derivatives which are traded on HKFE.

Contracts traded on HKFE can be classified as: I. equity derivatives II. index derivatives III. interest rate (or debt) derivatives IV. commodity derivatives

The SEHK Options Clearing House Limited provides integrated clearing, settlement, depository and nominee activities for stock options to their participants.

Someone, who expects the underlying stock to go up, will purchase call option. Buyers are required to pay the option premium, and no margin requirement is needed. Profit is subject to the potential profit on the stock upside, and maximum loss is limited to the premium paid to the call options.

Exchange-traded derivatives have standardized features and large liquidity. The exchange acts as the counterparty to both the buyer and the seller for settlement and clearance. HKFE specifies the minimum margin that an HKCC Participant must collect from its clients.

OTC volume dominates the derivatives market. Such contracts are tailor-made to the requirements of the parties involved. Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract.

There are more kinds of products in the in the OTC markets. In general, for exchange-traded derivatives, positions in client accounts are margined on a gross basis and initial margins need to be paid when opening a position. Oppositely, OTC market has no margin requirement.

Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

A swap is an agreement between two parties to exchange (or swap) the financial obligations – or income-C – they derive from a portfolio of assets or liabilities. Swaps are traded OTC and are highly customized. OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. Thus, it has counterparty risk.

A forward contract is an agreement in which two parties agree to the purchase and sale of an asset at some future time under such conditions as they agree. However, swaps are not trading with asset.

Call option means the right to buy an asset at a specified price. Since Mr. GAO just bought equity warrants at the same market price, Mr. GAO can make profit when the price of related assets get higher than such specified price. Speculation means taking profit from price movements, thus Mr. GAO is speculating.

Forward contracts and futures are agreements of a similar nature, the difference being that forward contracts are traded over and over the exchange.
Exchange-traded products are subject to change of appointment, regardless of the counterparty’s credit status, which is commonly referred to as counterparty risk or settlement risk.

The seller of call options have the obligation to sell the stocks at a specified price at maturity date.

SEHK is responsible to provide protection to the investing public

He does not hold related shares, he is willing to take profit from the price movement.

Mr. Liao bought call option without holding the underlying stock. This reflect he is not willing to hedge or arbitrage. He is willing to take profile from the change of price and he is speculating.

Mr. Liao bought put option without holding the underlying stock. This reflect he is not willing to hedge or arbitrage. He is willing to take profile from the change of price and he is speculating.

Mr. Liao bought put option with holding the underlying stock. He may want to hedge exposures.

He wants to hedge the risk of a possible drop in the price of the Vitamilk stock through the put option. If the price of the Vitamilk is really falling, the investor can offset the loss of the stock by exercising the put option.

Investor cannot hedge the exposures by purchasing shares and call option of that at the same time. The investor mentioned above is willing to take profit from price movements and thus he is speculating.

HKFE Clearing Corporation Limited (“HKCC”) provides the clearing and settlement function via the Derivatives Clearing and Settlement System (“DCASS”), which is an integrated system for derivatives markets covering futures and options.

Arbitrage mainly depends on the fact that there is an inequality between the difference between the spot price and the futures price and the holding cost when building the position. As time approaches time-to-maturity, the difference decreases.

A forward contract is not transferable and there is no margin or collateral requirement to assure performance of the contract. Forward contracts are traded OTC and thus there is no exchange acts as the counterparty between the buyer and seller.

Forward contracts are traded OTC and their terms are not standardized. Thus, forward contracts need not to mark to the market daily.

Forwards that fix interest rates are called interest rate forwards or forward rate agreements (“FRAs”). Here, two parties agree on a contract for borrowing or lending at a stated interest rate over a stated period that begins at some time in the future.

In general, positions in client accounts are margined on a gross basis and initial margins need to be paid when opening a position.

When the option is exercised, option seller has the obligation to sell or buy an asset at a specified price.

Contracts traded on HKFE can be classified as: (1)equity derivatives ;(2) index derivatives; (3) interest rate (or debt) derivatives; (4) commodity derivatives

Swaps are traded OTC and are highly customized. The most popular types are interest rate swaps and currency swaps.

The liquidity risk of real estate does not related to the price of derivatives.

Derivatives used for hedging purposes involve risk minimization, where derivatives eliminate the uncertainty associated with future price movements of the underlying assets.

If Mr. Gao sell futures of high-dividend stocks in the futures market, he need to sell the high-dividend stocks at the expiry date. The selling price is fixed when Mr. Gao sell the futures, so the price change of the high-dividend stocks will not affect Mr. Gao anymore.

If Miss Yu buy futures of stocks in the futures market, she need to buy the stocks at the expiry date. The purchasing price is fixed when Miss Yu buy the futures, so the price change of the stocks will not affect the number of shares that Miss Yu will buy in future.

It doesn’t have to change the assets combination of portfolios while we can hedge the exposure by using derivative.

Mr. Yin buys AUD futures and try to protect (or hedge) against adverse future price movements by “fixing” a predetermined price of AUD.

The advantage of futures contract is that the price is set now for delivery of an asset in the future, and they therefore hedge against unfavourable future price movements. Miss Chen sells Hang Seng index futures contract for Kaohsiung fund because she wants to hedge the decline in stock price, so she is more likely to be a hedger.

The advantage of futures contract is that the price is set now for delivery of an asset in the future, and they therefore hedge against unfavourable future price movements. Miss Chen sells bonds futures for Kaohsiung fund because she wants to hedge the decline in bond price, which is led by the rising interest rate, so she is more likely to be a hedger.

The rise of interest rate leads the drop of bond price. If Miss Yu’s worry comes true, selling bonds futures will make profit in future. The profit can partly offset the increase of loan payment and thus she is hedging.

Speculation means taking profit from price movements.

When USD rise against AUD , Mr. Gao can take profit in future if he sells AUD futures now. Mr. Gao is taking profit from price movements and thus he is speculator.

Miss Zeng sells one month HIBOR futures and is trying to take profit from interest rate movements and thus he is speculator. Thus, she is a speculator.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another. Arbitrage requires offsetting positions to be made at more or less the same time.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another. Arbitrage requires offsetting positions to be made at more or less the same time. Thus, Mr. Gao is arbitrager.

OTC volume dominates the derivatives market. Such contracts are tailor-made to the requirements of the parties involved. The transactions are arranged by phone and computer networks and not through a centralized marketplace. Unlike exchange-traded derivatives, OTC derivatives do not have standardized features and are therefore not generally traded to third parties, remaining a contractual arrangement between the two parties for the life of the contract. This implies that OTC derivatives have a higher risk of default (counterparty risk) than the exchange-traded type.

Derivatives are financial instruments that derive their value from that of an underlying asset or financial instrument. A debt is a contractual agreement between the borrower of funds and the lender of funds, and represents the existence of a loan. Debt securities represent debt that is traded on the debt market.

Derivatives are classified as either exchange-traded or OTC.

A futures contract is an agreement to buy or sell an underlying asset at a specified price and date in the future.

Derivatives contracts traded on HKFE can be classified as equity, index, interest rate (or debt) and commodity derivatives.

Options are agreements that give the buyer the right, but not the obligation, to buy or sell an asset at a specified price (referred to as the strike price) on or some time before (depending on the style of option) a specified date (also referred to as the expiry date).

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another. Arbitrage requires offsetting positions to be made at more or less the same time, so it does not affect price of the asset.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. Thus, arbitrage can reduce the market mispricing, increase liquidity, increase market efficiency.

Arbitrage means taking risk-free advantage of countervailing prices in different markets. For example, buying an asset at a low price in one market and then selling it at the same time at a higher price in another.

Arbitrage means the ability to exploit price differences between various markets and securities and make risk-free profits at more or less the same time. Since there is time zone difference between Hong Kong stock market and American stock market, we can’t make the arbitrage trading.

Securities margin financing is the process of securities being used as collateral to facilitate the purchase of additional exchange-traded securities. The writers of call options are required to deliver stock on being assigned. The difference between the price at which the stock is acquired and the strike price of the assigned option may be substantial and could represent an outright loss.

A hedge is a foreign exchange or derivative transaction that is conducted to minimize the risk of the transaction.

Options are agreements that give the buyer the right, but not the obligation, to buy or sell an asset as the strike price on or some time before the expiry date.

For the seller (also referred to as the writer) of a call option, it is an agreement that obliges him to sell an asset, in the event the option is exercised, at a specified price. Conversely, selling a put option obliges the writer to buy an asset, in the event the option is exercised, at a specified price.

Call options are agreements that give the buyer the right, but not the obligation, to buy an asset as the strike price on or some time before the expiry date.

Put option seller has the obligation to buy an asset at a specified price in the event of the option being exercised.

Stock Warrant is traded on SEHK. The trading system for securities traded on the SEHK is the OTP-C.

Stock Warrant is traded on SEHK. Clearing and settlement of securities traded on the SEHK is processed through the Central Clearing and Settlement System (“CCASS”).

Some hedge funds specialize in derivatives market to speculate on future price trends.

hen trading futures, both the buyer and the seller must settle the futures contract regardless of how the underlying asset price moves. With options the buyer has the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset.

The trading system for securities traded on the SEHK is the OTP-C. This is an order-driven system where orders to buy and sell are matched with the opposite orders when they become available.

Trading on HKFE is fully automated via the HKATS of HKEx.

The stock options market is run by the SEHK and settled through The SEHK Options Clearing House Limited.

The stock options market is run by the SEHK and settled through The SEHK Options Clearing House Limited.

Stock options are traded at Hong Kong Futures Automated Trading System(HKATS).

Stock options are settled at Derivatives Clearing and Settlement System(DCASS).

The difference between forwards and futures include:
I. Futures care less about who is the counterparty because there is novation and less credit risks.
II. Futures is more standardized.
III. It’s easier to offset the positions if you trade futures because of high liquidity.
IV. Futures market is more centralized.

It sold 25 contracts of index futures at 28500 and offset them at 29000. There is a total loss of 12500 points. Each point is $50. Therefore, the loss is $50*12500=$625000.

The value of the stock is 35 million when the index is at 28500. So, when the index is at 28900, the value of the stock is (35/285)*289=35.49 million with an appreciation of 0.49 million.

With a loss in hedging of 0.625 million and a gain of stock increase of 0.49 million, there is a total loss of 0.13 million

Stock options are
traded on the Hong Kong Automated Trading System of Hong Kong Futures Exchange Limited.

If you sell Hang Seng index futures, your counterparty buys it and may think that it’s at the bottom or underestimated.