Hang Seng Index (HSI), the benchmark of the Hong Kong stock market, is one of the best known indices in Asia and widely used by fund managers as their performance benchmark.
The HIS is a market capitalization-weighted index (shares outstanding multiplied by stock price) of the constituent stocks. The influence of each stock on the index’s performance is directly proportional to its relative market value. Constituent stocks with higher market capitalization will have greater impact on the index’s performance than those with lower market capitalization. The constituent stocks are grouped under Commerce and Industry, Finance, Properties and Utilities sub-indices. To meet the growing interests in the Hong Kong stock market and rising demand for related hedging tools, the Hong Kong Futures Exchange (HKFE) first introduced HSI futures contracts in May 1986.
Contributing factors:
1. Economic development
2. Inflation
3. International stock market
4. Labor market situation
5. Import and export
6. Domestic sales
7. Fluctuation on exchange rate
8. International factors
9. Political factors
10. Natural disaster
Advantages:
The HSI futures and options provide investors with a set of effective instruments to manage portfolio risk and to capture index arbitrage opportunities. The popularity of Hang Seng Index futures and options has developed gradually with increasing domestic and international investors’ participation.
1. Proven Markets
The HSI futures and options allow experienced and novice investors alike to participate in the performance of constituent stocks in the index. As both local and international investors regard Hang Seng index as a time-tested benchmark for the Hong Kong equity market and yardstick of portfolio performance, these contracts and consistently used by different investors for trading and risk management purposes.
2. Cost Effective
HSI futures and options facilitate hedging activities in a cost-effective way as these contracts are traded on a margin basis. The margin to carry an open position is only a fraction of the contracted value.
3. Low transaction costs
As the total value of high-capitalization stocks represented in each HSI futures and options contract is substantial and only one commission is charged to establish or liquidate a contract, transaction costs are low when compared to purchasing or selling the constituent stocks.
4. Clearing house guarantee
HSI futures and options are registered, cleared and guaranteed by the HKFE Clearing Corporation (HKCC), a wholly-owned subsidiary of the HKFE. The HKCC guarantee does not cover an HKCC Participant’s obligations to its clients. Investors should exercise due care and diligence when deciding through whom they will conduct business.
