HKSI LE Paper 7 cheat sheet

Three regulators divide the market: the SFC regulates securities, futures, asset management and listed-company conduct; the HKMA supervises banks and the currency; the Insurance Authority licenses insurers and intermediaries.

The SFC's ten core principles of conduct (General Principle 1 honesty/fairness through GP9 client assets) sit above the specific rules in the Code of Conduct for Persons Licensed by or Registered with the SFC.

Licensing types: Type 1 dealing in securities, Type 2 dealing in futures, Type 3 leveraged foreign exchange, Type 4 advising on securities, Type 5 advising on futures, Type 6 corporate finance advice, Type 7 automated trading services, Type 8 securities margin financing, Type 9 asset management, Type 10 credit rating.

A licensed corporation needs at least two Responsible Officers, at least one of whom is an executive director available at all times to supervise the regulated activity; a RO must have four years' relevant industry experience in the past six years.

The Investor Compensation Fund covers claims up to HK$500,000 per investor for defaults of licensed intermediaries in exchange-traded products, funded by exchange levies rather than by general taxpayer money.

HKEX operates the securities and derivatives exchanges plus three clearing houses (CCASS for securities, SEOCH for stock options, HKCC for futures); the SFC approves exchange rules and listing rules.

The Securities and Futures Ordinance (Cap. 571) creates the offences of market manipulation, false trading, price rigging, disclosure of false or misleading information inducing transactions, and insider dealing, with civil and criminal routes.

The Stock Connect and Bond Connect programmes give non-Hong Kong investors access to Mainland markets through Hong Kong clearing infrastructure, with trading quotas and eligible-securities lists set by the respective authorities.

Hong Kong cash equities settle on T+2 through CCASS; settlement risk is handled by the Central Clearing and Settlement System's novation and margin arrangements.

Board lot sizes are set by the issuer (commonly 500, 1,000 or 2,000 shares); the minimum tick size depends on the stock's price band, so tick value is not uniform across the market.

The Hang Seng Index is a free-float-adjusted market-capitalisation index capped at 8% for any single constituent; the HSCEI tracks Mainland-incorporated H-shares and red chips.

Short selling is permitted only for designated securities on the SFC's list, must be covered (no naked shorting), and must be executed at or above the best current bid price (the tick rule).

Stamp duty on Hong Kong stock transfers is charged on both buyer and seller; transaction levy, trading fee and CCASS fees are separate and additive to the headline rate.

A rights issue gives existing holders a pro-rata entitlement, usually priced at a discount; a placing issues new or existing shares to selected investors and dilutes non-participants.

H-shares are shares of Mainland-incorporated companies listed in Hong Kong; red chips are Hong Kong-listed companies incorporated outside the Mainland but controlled by Mainland entities; P-chips are private-enterprise equivalents.

Closing Auction Session (CAS) determines the closing price from an order book auction after continuous trading ends; orders entered during CAS cannot be cancelled after the no-cancellation period starts.

Bond price and yield move inversely; for a given yield change, price sensitivity is approximated by modified duration, with convexity as the second-order correction for large moves.

Macaulay duration is the weighted average time to cash flows; modified duration = Macaulay duration / (1 + y/m), where m is coupons per year.

Accrued interest uses the day-count convention stated in the terms (actual/actual, actual/365, 30/360); dirty price = clean price + accrued interest.

The Exchange Fund Bills and Notes programme is issued by the HKMA on behalf of the Government; Bills mature in 91, 182 or 364 days and Notes carry fixed coupons at 2, 3, 5, 10 and 15 years.

HIBOR is the Hong Kong dollar interbank offered rate fixed daily for tenors from overnight to 12 months; it is the reference for floating-rate HK$ notes and loans.

Credit spread = yield on the bond minus yield on the comparable-maturity government benchmark; widening spreads signal deteriorating credit or liquidity conditions.

A bond's yield to maturity assumes all coupons are reinvested at the YTM and the bond is held to maturity; realised return differs if the reinvestment rate or holding period changes.

Money market instruments (certificates of deposit, commercial paper, Treasury bills, repurchase agreements) typically have original maturities of one year or less and are quoted on a discount or add-on yield basis.

The HK dollar is linked to the US dollar within a convertibility band of 7.75 (strong-side) to 7.85 (weak-side); the HKMA's licensed banks must buy USD at 7.75 and sell USD at 7.85 under the Link.

A spot FX quote has a base and a quote currency; in EUR/USD = 1.10, EUR is the base, so a rise means the base currency appreciated against the quote currency.

Forward points reflect the interest rate differential between the two currencies; the covered interest parity approximation is F ≈ S × (1 + r_quote) / (1 + r_base).

An FX swap combines a spot leg and an offsetting forward leg; a currency swap exchanges principal and periodic interest in two currencies over the life of the deal.

Trading conventions matter: most pairs quote to four or five decimals, and the market convention determines which currency is the base (for example USD/JPY and USD/CHF have USD as base, while EUR/USD and GBP/USD have the other currency as base).

Transaction exposure arises from existing foreign-currency receivables or payables; translation exposure from consolidating foreign subsidiaries; economic exposure from long-run competitiveness effects of FX moves.

Hedging tools include forwards (binding, OTC), futures (standardised, margined), FX options (right but not obligation, premium paid) and natural hedging by matching currency of costs and revenues.

The HKMA's Currency Board system requires that the Monetary Base be fully backed by foreign currency reserves at the Link rate, so local interest rates adjust rather than the exchange rate.

Futures are exchange-traded, standardised and marked to market daily through a clearing house; forwards are OTC, customised and carry counterparty credit risk.

A futures long profits when the underlying price rises; the daily settlement variation margin equals the price change times contract multiplier times number of contracts.

For a call, the buyer's maximum loss is the premium and the maximum gain is unlimited; for a put, maximum loss is the premium and maximum gain is the strike minus premium.

Put-call parity for European options on non-dividend-paying stock: C − P = S − K/(1 + r)^T; a violation allows arbitrage.

The Black-Scholes inputs are spot price, strike, time to expiry, volatility, risk-free rate and dividend yield; delta, gamma, theta, vega and rho measure sensitivities to those inputs.

An interest rate swap exchanges fixed for floating payments on a notional principal; the swap's value equals the difference between the present values of the two legs.

Structured products combine a bond or deposit with a derivative overlay; capital-protected notes typically embed a call option funded by forgone interest, and knock-out or knock-in features change the payoff profile.

In Hong Kong, SFC rules on complex products and the Code of Conduct require suitability assessment, product due diligence and disclosure of the maximum loss and early-termination features to retail clients.

An SFC-authorised collective investment scheme must meet the Fund Manager Code of Conduct and the UT Code; authorisation is not an endorsement of performance or credit quality.

Unit trusts and mutual funds pool investor money; open-ended funds issue and redeem at NAV, while closed-ended funds trade on exchange and may trade at a premium or discount to NAV.

NAV per unit = (total assets − total liabilities) / number of units outstanding; subscription and redemption prices may add or deduct a front-end load or redemption fee.

ETFs listed in Hong Kong may be physical (hold the underlying) or synthetic (use swaps); leveraged and inverse products are regulated as complex products with specific SFC requirements.

Asset allocation explains most of the variability of portfolio returns over time; strategic allocation sets long-run weights and tactical allocation adjusts them within policy limits.

Markowitz portfolio variance for two assets: σp² = w1²σ1² + w2²σ2² + 2w1w2ρσ1σ2; diversification benefit rises as the correlation falls.

The Sharpe ratio = (portfolio return − risk-free rate) / standard deviation; the Treynor ratio uses beta instead of standard deviation and suits well-diversified portfolios.

Fund managers must manage conflicts of interest, allocate trades fairly, disclose soft-dollar and commission-sharing arrangements, and report performance against the stated benchmark.

A sponsor must be appointed at least two months before a Main Board listing application; the sponsor conducts due diligence and must be independent of the issuer.

Main Board financial eligibility test (profit test): at least HK$35 million profit in the most recent year and HK$45 million aggregate over the two preceding years, with market capitalisation of at least HK$500 million at listing.

The market-capitalisation/revenue/revenue-growth test and the market-capitalisation/revenue/cash-flow test are alternative eligibility routes for Main Board applicants; GEM has lower thresholds.

A controlling shareholder is subject to a 12-month post-listing lock-up on disposal of shares under the Listing Rules; the public float must be at least 25% of issued shares (a lower 15% applies to issuers with market cap above HK$10 billion at listing).

The Takeovers Code requires a mandatory general offer when a person acquires 30% or more of the voting rights, or increases a holding between 30% and 50% by 2% or more in 12 months; the offer price must be the highest paid in the preceding six months.

A whitewash waiver exempts an offer obligation where independent shareholders approve; the Executive of the SFC administers the Takeovers Code and rules on dispensations.

Type 6 corporate finance advice covers advising on Listing Rules and Takeovers Code compliance, and advising on offers; a sponsor's work also requires Type 6 unless an exemption applies.

Connected transactions require independent shareholder approval unless an exemption applies; de minimis thresholds are based on percentage ratios (assets, profits, revenue, consideration, equity capital).