Derivatives: Futures, Options, Swaps and Structured Products
This domain tests contract mechanics, risk profiles and the clearing route for exchange-traded and OTC derivatives, plus the listing regime for structured products sold to the public.
Exchange-traded futures and options
HKFE lists HSI and HSCEI futures and options, Mini-HSI and Mini-HSCEI contracts, stock futures and options, RMB currency futures and gold futures. Contract value is the index level times the multiplier: HK$50 per point for HSI and HSCEI futures, HK$10 per point for Minis. Stock futures use the board lot of the underlying as the multiplier. Margin is a performance bond, not a cost: HKCC sets initial margin, marks positions to market daily and calls variation margin.
Options
SEHK stock options are American style and clear through SEOCH; HKFE index options are European style and clear through HKCC. Premium is paid by the buyer. Long call and long put risk is capped at premium; a short call carries theoretically unlimited loss, and a short put risks the strike less premium received. For European options, put-call parity is C − P = S − K/(1+r)^T.
Swaps and OTC derivatives
Interest rate swaps, cross-currency swaps, total return swaps and credit default swaps are bilateral contracts. In Hong Kong, reporting of prescribed OTC derivative transactions to the HKMA's trade repository has been mandatory since 2015, certain standardised interest rate swaps must be centrally cleared through a designated CCP, and non-centrally cleared trades attract margin requirements.
Structured products
Derivative warrants, callable bull/bear contracts and inline warrants are listed under Chapter 15A of the Listing Rules, with a mandatory liquidity provider and collateral or issuer credit requirements. CBBCs carry a mandatory call event: if the underlying touches the call price, the contract terminates and residual value may be zero.
Worked example
A client buys two HSI futures at 18,000 and sells at 18,500. Profit = 500 points × HK$50 × 2 = HK$50,000 before commission and levies. Had the index fallen to 17,600, the loss would be 400 × HK$50 × 2 = HK$40,000, and a margin call would follow once equity fell below the maintenance margin.
Traps
- Swapping SEOCH and HKCC.
- Assuming premium is refundable or that a long option must be exercised.
- Treating exchange trading and central clearing as the same thing.
- Ignoring the mandatory call feature of CBBCs.
- Forgetting that a short call, not a long call, has unlimited loss potential.