Derivatives: Futures, Options, Swaps and Structured Products
This domain covers exchange-traded futures and options on HKFE, the structured products sold to retail investors, and the OTC overlay. Expect contract-specification questions and payoff arithmetic rather than theory.
Exchange-traded contracts
HKFE's flagship contracts are HSI futures and options (HK$50 per index point), Mini-HSI futures (HK$10 per point), HSCEI futures (HK$50), stock futures (normally one board lot per contract) and RMB currency futures. Futures are margined: an initial margin at opening, marked to market daily against a maintenance margin, with HKCC as central counterparty.
Options
A buyer pays a premium and holds a right; a writer receives the premium and carries the obligation and the margin. Premium = intrinsic value + time value, with call intrinsic = max(0, S − K). The Greeks: delta (premium change per point of underlying), gamma, theta (time decay), vega (volatility), rho (rates). A delta-neutral book still carries gamma and vega risk.
Structured products
- Derivative warrants: third-party issued, with exercise price, ratio and expiry; delta and effective gearing are the risk measures.
- CBBCs: bull or bear contracts with a call price and mandatory-call feature; residual value can be zero.
- ELNs: an embedded short put; SFC rules govern offers of non-collateralised structured products.
OTC
ISDA master agreements and credit support annexes, plus reporting of specified OTC derivative transactions to the HKTR and clearing through designated CCPs.
Worked example. A trader buys one HSI futures contract at 18,000 and closes at 18,420. Profit = 420 points × HK$50 = HK$21,000. Against an initial margin of HK$90,000 that is a 23.3% return on margin. Had the index fallen to 17,800 instead, the loss would be 200 × 50 = HK$10,000, collected as a variation margin call the following morning.
Traps
- Applying the Mini multiplier (10) to a full HSI contract.
- Calling an option writer's risk limited - a short call's loss is open-ended.
- Assuming a CBBC's residual value is protected.
- Forgetting that futures are marked to market, so unrealised losses become cash calls.