The dividend discount model (DDM) is a valuation method used to estimate the price of a stock based on the predicted series of future dividends discounted back to their present value. The perpetual dividend discount model, a simplified version, is applicable when dividends are expected to remain constant indefinitely. The formula for this model is P = D/r, where P is the price of the stock, D is the constant dividend per share, and r is the required rate of return. The dividend growth model, on the other hand, assumes that dividends will grow at a constant rate (g) indefinitely. Its formula is P = D1 / (r – g), where D1 is the expected dividend in the next period.

Statement I is correct because the perpetual DDM is indeed suitable for companies with stable dividend policies where dividends are not expected to grow significantly. Statement II is incorrect because the dividend growth model requires the growth rate (g) to be less than the required rate of return (r); otherwise, the model produces a negative or undefined stock price, which is not economically meaningful. Statement III is correct because the dividend growth model incorporates the expected growth rate of dividends, making it more realistic than the perpetual DDM for companies that are expected to increase their dividends over time. Statement IV is incorrect because the perpetual DDM assumes a constant dividend, not a constant growth rate. Therefore, the correct combination is I & III only.

The Exchange Participant (EP) status requires a corporation to meet specific qualifications to ensure market integrity and investor protection, as outlined by the Stock Exchange of Hong Kong (SEHK). Statement I is correct because the SEHK must be satisfied that the applicant is ‘fit and proper,’ which includes assessing their financial soundness, regulatory compliance history, and overall integrity. This is a crucial aspect of maintaining the quality of market participants. Statement II is also correct; while the provided text does not list all costs, it explicitly states that the list is not exhaustive, implying that there are indeed other costs associated with becoming an EP beyond those mentioned. This aligns with the reality that regulatory compliance and operational readiness involve various expenses. Statement III is incorrect because the Main Board is for established companies with proven profit performance, while GEM is positioned as a second board and stepping stone towards the Main Board. Statement IV is incorrect because the primary market is where securities are issued for the first time, not the secondary market. Therefore, the correct combination is I & II only.

The primary market is where new securities are first issued. Companies undertake IPOs to raise capital (Statement I), and this process is governed by listing rules (Statement II). The Main Board and GEM are indeed the two equity markets in Hong Kong (Statement III). Therefore, all three statements are correct. The primary market does not involve trading of existing shares between investors; that is the secondary market (Statement IV). Listing rules, as detailed in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, ensure transparency and investor protection during the IPO process. These rules cover various aspects, including eligibility criteria, disclosure requirements, and ongoing obligations for listed companies. The Securities and Futures Ordinance (SFO) also provides the legal framework for regulating securities offerings in Hong Kong. Understanding the primary market is crucial for investors and market participants as it represents the initial point of capital formation for companies seeking public funding. The Hong Kong Exchanges and Clearing Limited (HKEX) oversees the operation of both the Main Board and GEM, ensuring a fair and orderly market for both issuers and investors. The primary market plays a vital role in facilitating economic growth and development by providing companies with access to capital for expansion and innovation.

The correct answer is I & II only.

Statement I is correct because GEM provides an avenue for companies that may not yet meet the stringent profit requirements of the Main Board to access capital markets. This is particularly beneficial for startups or companies in their early growth stages. According to the information, GEM does not require companies to have achieved a record of profitability as a condition of listing.

Statement II is also correct. GEM is designed to cater primarily to professional and sophisticated investors who understand and are willing to accept the higher risks associated with investing in smaller, growth-oriented companies. This is explicitly stated in the provided text, which mentions that investment on GEM carries a higher risk than on the Main Board.

Statement III is incorrect because while GEM does have listing requirements, they are generally less stringent than those of the Main Board. This allows companies that might not qualify for the Main Board to still list and raise capital. The text mentions that the scope of listing requirements for GEM is largely in line with that of the Main Board but less stringent.

Statement IV is incorrect because GEM was repositioned as a second board and stepping stone towards the Main Board in July 2008. This means that companies often use GEM as a platform to grow and eventually transition to the Main Board once they meet the more demanding requirements. Therefore, it is not intended as a permanent listing place for established companies.

The debt-to-equity ratio is a financial leverage ratio that compares a company’s total debt to its total equity. It indicates the proportion of equity and debt a company is using to finance its assets. A higher debt-to-equity ratio generally means that a company has been more aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. A lower ratio suggests a more conservative approach.

Statement I is correct because a high ratio suggests greater financial risk due to increased debt obligations. Statement II is correct because a lower ratio indicates a more conservative financial structure with less reliance on debt. Statement III is incorrect because a high ratio does not always guarantee higher profitability; it can increase risk. Statement IV is incorrect because the ideal ratio varies by industry and company-specific factors, not a universally fixed number. Therefore, only statements I and II are correct.

Statement I is correct because Monte Carlo simulation is indeed a widely used method for option pricing, especially with increased computing power. It allows for the approximation of underlying stock behavior through repeated random processes, considering various scenarios, as highlighted in the provided material. Statement II is incorrect because while simulation methods are used, the Black-Scholes model still holds significance, especially for European-style options, and is not entirely replaced. Statement III is correct because simulation methods, like Monte Carlo, are particularly useful when dealing with complex options or situations where the assumptions of the Black-Scholes model do not hold, such as options with multiple underlying assets or path-dependent options. Statement IV is incorrect because while simulation provides an approximation, it does not guarantee a precise value. The accuracy of the simulation depends on the number of iterations and the quality of the model used to simulate the underlying asset’s behavior. Therefore, the correct combination is I & III only. According to the Securities and Futures Ordinance (SFO) in Hong Kong, firms using sophisticated models like Monte Carlo for pricing and risk management must ensure these models are validated and properly documented, and that staff are adequately trained in their use. This is to ensure fair pricing and manage potential risks associated with complex financial instruments.

The interest coverage ratio is a financial metric used to assess a company’s ability to pay its interest expenses with its available earnings. A higher ratio generally indicates a stronger capacity to meet interest obligations. Statement I is correct because a higher interest coverage ratio suggests the company has a greater cushion to comfortably pay its interest expenses. Statement II is incorrect because a lower interest coverage ratio, not a higher one, would typically raise concerns about the company’s financial health and its ability to service its debt. Statement III is correct because an increasing interest coverage ratio over time indicates that the company’s ability to cover its interest expenses is improving, which is a positive sign for investors and creditors. Statement IV is incorrect because a decreasing interest coverage ratio would suggest a deterioration in the company’s ability to meet its interest obligations, potentially signaling financial distress. Therefore, only statements I and III are correct. Understanding the interest coverage ratio is crucial for assessing a company’s solvency and financial risk, as highlighted in the guidelines issued by the Hong Kong Securities and Futures Commission (SFC) regarding financial analysis and risk management.

The question explores the concept of a ‘covered call’ strategy, a common tactic employed by investors seeking to generate income from their existing stock holdings. A covered call involves selling a call option on a stock that the investor already owns. The premium received from selling the call option provides immediate income. However, this strategy also caps the potential upside gain from the stock, as the investor is obligated to sell the stock at the strike price if the option is exercised.

The primary goal of a covered call is to generate income (the premium) while mitigating some downside risk. The investor benefits if the stock price remains stable or declines slightly, as they keep the premium and the option expires worthless. However, if the stock price rises significantly above the strike price, the investor will be forced to sell their shares, limiting their potential profit. The investor retains the stock and the premium if the option is not exercised.

In the context of Hong Kong’s securities market, understanding covered call strategies is crucial for investors managing portfolios and seeking to enhance returns through options trading. Regulatory guidelines, such as those provided by the Securities and Futures Commission (SFC), emphasize the importance of understanding the risks and rewards associated with options trading, including strategies like covered calls. Investors should carefully consider their investment objectives, risk tolerance, and the potential impact of market movements before implementing such strategies.

The moving average (MA) is a fundamental technical indicator used to smooth out price data over a specified period. It helps to identify the direction of a trend by reducing the impact of short-term price fluctuations. A shorter-period MA, such as a 10-day MA, will be more sensitive to price changes and react more quickly, while a longer-period MA, such as a 200-day MA, will be less sensitive and provide a smoother representation of the trend. The choice of the period depends on the investor’s trading style and the time frame they are interested in. Shorter periods are favored by short-term traders, while longer periods are used by long-term investors. When the price crosses above the moving average, it can be seen as a bullish signal, suggesting that the price is starting to trend upwards. Conversely, when the price crosses below the moving average, it can be interpreted as a bearish signal, indicating a potential downward trend. Technical analysts often use multiple moving averages with different periods to generate trading signals. For example, a ‘golden cross’ occurs when a shorter-term MA crosses above a longer-term MA, which is considered a strong bullish signal. A ‘death cross’ occurs when a shorter-term MA crosses below a longer-term MA, which is considered a bearish signal. The Securities and Futures Commission (SFC) in Hong Kong does not specifically regulate the use of technical indicators like moving averages, but emphasizes the importance of using them responsibly and not relying solely on them for investment decisions. Investors should always conduct thorough research and consider other factors before making any investment decisions.

Statements I, II, and IV are correct.

I. A shorter period moving average will react more quickly to price changes than a longer period moving average. This is because the average is calculated over a smaller number of data points, making it more sensitive to recent price fluctuations. A longer period moving average smooths out the price data more effectively, reducing the impact of short-term volatility.

II. Moving averages can act as dynamic support and resistance levels. In an uptrend, the moving average often acts as a support level, as prices tend to bounce off it. Conversely, in a downtrend, the moving average can act as a resistance level, preventing prices from moving higher. These levels are dynamic because they change over time as the moving average is recalculated.

IV. The moving average convergence divergence (MACD) is derived from moving averages. The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. A nine-day EMA of the MACD, called the “signal line”, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

Statement III is incorrect because while moving averages can be used on volume data, they are most commonly applied to price data to identify trends and potential support/resistance levels.

The Hong Kong Stock Exchange (HKEX) prioritizes investor protection and market integrity through its listing rules. Statement I is correct because ensuring sufficient information is available to potential investors for informed assessments is a core principle of listing requirements, aligning with the goal of fair and orderly securities marketing. This is explicitly stated in the ‘General Principles for Listing’ which emphasizes providing potential investors with sufficient information to enable a properly informed assessment of an issuer. Statement II is also correct. The principle of treating all holders of listed securities fairly and equally is fundamental to maintaining market confidence and preventing unfair advantages for certain shareholders. This principle is directly addressed in the ‘General Principles for Listing’, which aims to secure assurances and equality of treatment for holders of securities. Statement III is incorrect. While directors must act in the interest of shareholders, the rules do not explicitly require directors to prioritize shareholders as a whole. Statement IV is incorrect because new issues of equity securities are generally offered to existing shareholders via rights, but this is subject to exceptions and agreements. Therefore, the correct combination is I & II only.

The Hong Kong Interbank Offered Rate (HIBOR) is indeed the offer rate at which banks in Hong Kong lend funds to each other in the interbank market. This aligns with Statement I. HIBOR serves as a crucial benchmark for short-term interest rates and liquidity conditions within the Hong Kong financial system, making Statement II correct. The fluctuations in HIBOR directly reflect the supply and demand dynamics of funds in the interbank market; an increase in the supply of funds typically leads to a decrease in HIBOR, and vice versa, thus Statement III is also correct. While HIBOR is a significant indicator, it is not the sole determinant of monetary policy in Hong Kong. The Hong Kong Monetary Authority (HKMA) also considers various other factors, such as global economic conditions, inflation, and exchange rate stability, when formulating monetary policy. Therefore, Statement IV is incorrect. The correct combination is I, II & III only.

The debt-to-equity ratio is a financial leverage ratio that compares a company’s total debt to its total equity. It is calculated by dividing a company’s total liabilities by its shareholders’ equity. A higher debt-to-equity ratio indicates that a company has used more debt to finance its assets, which can make it riskier. A lower debt-to-equity ratio indicates that a company has used less debt to finance its assets, which can make it less risky. However, a very low ratio might also suggest that the company is not taking advantage of potential leverage to grow. The acceptable level of debt-to-equity ratio varies by industry. Capital-intensive industries, such as manufacturing or utilities, often have higher ratios than service-based industries. Investors use the debt-to-equity ratio to assess a company’s financial risk and stability. It’s crucial to compare a company’s debt-to-equity ratio to its industry peers and its own historical ratios to get a meaningful understanding of its financial leverage. In Hong Kong, the Securities and Futures Commission (SFC) does not prescribe specific acceptable debt-to-equity ratios for listed companies. However, the SFC emphasizes the importance of transparency and disclosure of financial information, including debt levels, to allow investors to make informed decisions. Companies listed on the Hong Kong Stock Exchange (HKEX) are required to disclose their debt-to-equity ratio in their annual reports, providing investors with the necessary information to assess their financial risk.

The Hang Seng Index (HSI) employs a market capitalization-weighted methodology, meaning that companies with larger market capitalizations have a greater influence on the index’s performance. This weighting reflects the relative size of each constituent company within the overall market. The turnover ranking of companies, indicating the volume of shares traded, is not a direct factor in determining the HSI’s composition or weighting. While high turnover can indicate investor interest and liquidity, it doesn’t automatically translate to a larger representation in the index. The HSI aims to represent the Hong Kong stock market, but the representation of sub-sectors within the HSI does not perfectly mirror the exact proportions of those sub-sectors in the overall market. The HSI selects constituents to provide a broad market representation, but practical considerations and index rules may lead to slight deviations. The financial performance of companies, while crucial for their inclusion and continued presence in the HSI, is not the primary driver of their weighting. Market capitalization is the dominant factor. Therefore, only statement I is correct. The ‘Guidelines on Securities and Futures Ordinance’ emphasize the importance of fair and accurate market representation, which the HSI strives to achieve through its market capitalization-weighted approach.

The question explores the profit and loss dynamics of a short call option position. A short call option obligates the seller (writer) to sell the underlying asset at the strike price if the option is exercised by the buyer. The maximum profit a seller can achieve is limited to the premium received when selling the option. This occurs if the market price of the underlying asset remains at or below the strike price at expiration, rendering the option worthless. Conversely, the potential loss is unlimited because the market price of the underlying asset could theoretically rise indefinitely. The break-even point is calculated by adding the premium received to the strike price. If the market price exceeds this break-even point, the seller will begin to incur losses. The Securities and Futures Ordinance (SFO) requires licensed individuals to understand these risk profiles, especially when advising clients on options trading strategies. The Intermediaries Code of Conduct also emphasizes the need for intermediaries to fully disclose the risks associated with options trading, including the potential for unlimited losses in short positions. Failing to adequately explain these risks can lead to regulatory action by the Securities and Futures Commission (SFC).

CCASS facilitates the clearing, settlement, and custody of securities traded on the Hong Kong Stock Exchange. When an investor places a buy order through a broker, the broker inputs this order into the Automated Matching System (AMS). Once the order is matched, CCASS takes over to ensure the trade is settled efficiently. The process involves several key steps, including trade capture, netting, and settlement. Netting is a crucial function where CCASS consolidates all buy and sell transactions for each participant, determining the net obligation (either to deliver securities or pay funds). This reduces the number of actual transfers required, enhancing efficiency and reducing risk. Settlement occurs on T+2 (two business days after the trade date), where securities and funds are exchanged between participants. CCASS also provides custody services, holding securities on behalf of participants, which minimizes the need for physical transfers and reduces the risk of loss or theft. The entire process is governed by the rules and regulations set forth by Hong Kong Exchanges and Clearing Limited (HKEX) to ensure market integrity and investor protection. Understanding the role of CCASS is vital for anyone involved in the Hong Kong securities market, as it underpins the smooth functioning of trading and settlement activities, contributing to the overall stability and efficiency of the market. The Securities and Futures Ordinance (SFO) provides the legal framework for CCASS operations, emphasizing its importance in maintaining market order and protecting investors’ interests.

The Hang Seng Index (HSI) methodology stipulates that individual stock weightings are capped at 15% on regular rebalancing days. When a stock’s weighting exceeds this threshold, its market capitalization is adjusted downwards to comply with the cap. This adjustment necessitates recalculating the aggregate market capitalization to reflect the new parameters. The new adjusted market capitalization is then used to determine the index divisor, which ensures the index level accurately reflects market movements without being distorted by the weighting adjustment. The formula for calculating the new index level involves comparing the adjusted aggregate market capitalization to the original aggregate market capitalization and applying the change to the previous day’s index level. This process maintains the continuity and integrity of the HSI as a reliable indicator of the Hong Kong stock market’s performance. The adjustment ensures that no single stock unduly influences the index level, thereby providing a more balanced representation of the overall market. The rebalancing mechanism is crucial for maintaining the HSI’s representativeness and investability, aligning it with regulatory guidelines and market best practices. The Hang Seng Indexes Company Limited provides detailed guidelines on index methodology, including the treatment of individual stock weightings and the calculation of the index divisor.

The debt-to-equity ratio is a financial leverage ratio that compares a company’s total debt to its total equity. It is calculated by dividing a company’s total liabilities by its shareholders’ equity. This ratio indicates the proportion of equity and debt a company uses to finance its assets. A higher debt-to-equity ratio generally means that a company has been more aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. A lower debt-to-equity ratio signals a more conservative approach to financing. However, it is important to consider industry standards when evaluating this ratio, as some industries are more capital-intensive and typically have higher debt levels. The debt-to-equity ratio is used by investors and creditors to assess a company’s financial risk and stability. It is crucial to analyze this ratio in conjunction with other financial metrics and industry benchmarks to gain a comprehensive understanding of a company’s financial health. The Securities and Futures Commission (SFC) in Hong Kong emphasizes the importance of understanding financial ratios like the debt-to-equity ratio for licensed individuals, as it aids in assessing the financial stability and risk profile of companies whose securities are being dealt with or advised upon.

Statement I is correct because, according to established technical analysis principles, the longer a support or resistance level is tested and holds, the more significant it becomes. This is due to the increased confidence market participants place in that level as a reliable barrier. Statement II is also correct; higher trading volume at a support or resistance level indicates stronger conviction among traders that the price will either bounce off the support or be rejected by the resistance. This increased activity reinforces the level’s importance. Statement III is correct because when a support level is decisively broken, it often turns into a resistance level, and vice versa. This reversal is a common phenomenon as market psychology shifts, and traders who previously bought at the support level may now look to sell at that same level if it’s broken. Statement IV is correct as well. Many traders and investors actively monitor support and resistance levels to identify potential entry and exit points. They often place buy orders near support levels and sell orders near resistance levels, anticipating price reversals. Therefore, all statements are correct, reflecting the key principles of support and resistance in technical analysis.

Technical analysis, as applied within the Hong Kong financial market context, involves scrutinizing historical market data, primarily price and volume, to forecast future price movements. This approach is predicated on the belief that market prices reflect all available information and that historical price patterns tend to repeat themselves. The Securities and Futures Commission (SFC) of Hong Kong does not explicitly endorse or prohibit technical analysis, but it does require that any advice or recommendations provided to clients be based on reasonable grounds and disclosed appropriately.

Line charts, bar charts, and candlestick charts are fundamental tools in technical analysis. Line charts, the simplest, connect closing prices over a specified period, providing a basic view of price trends. Bar charts offer more detail, displaying the high, low, opening, and closing prices for each period as vertical bars. Candlestick charts, a variation of bar charts, visually represent the price range and the relationship between opening and closing prices, often using color to indicate whether the closing price was higher or lower than the opening price. These charts help analysts identify patterns, support and resistance levels, and potential trend reversals. The choice of chart type depends on the analyst’s preference and the level of detail required for their analysis. Understanding these tools is crucial for anyone involved in securities trading or investment advisory services in Hong Kong, ensuring they can interpret market data effectively and comply with regulatory requirements for providing informed advice.

The debt ratio is a fundamental solvency metric that reveals the extent to which a company’s assets are financed by debt. A higher debt ratio indicates a greater reliance on borrowed funds, which can amplify both potential returns and financial risks. While leveraging debt can fuel growth by enabling investments in assets that generate income and profit, it simultaneously elevates the company’s vulnerability to financial distress, particularly during economic downturns or periods of reduced profitability. A high debt ratio suggests that a larger portion of the company’s earnings must be allocated to debt servicing, potentially limiting its financial flexibility and capacity to invest in future opportunities. Conversely, a lower debt ratio implies a more conservative capital structure, with a greater proportion of assets financed by equity. This can provide a buffer against financial shocks and enhance the company’s ability to secure additional financing if needed. However, it may also indicate a missed opportunity to leverage debt for growth. The interpretation of the debt ratio should consider the industry context, as certain sectors typically operate with higher debt levels than others. Additionally, it’s essential to analyze trends in the debt ratio over time and compare it to those of competitors to gain a comprehensive understanding of the company’s financial risk profile. According to the Securities and Futures Commission (SFC) guidelines, licensed corporations must maintain adequate financial resources, and a high debt ratio could raise concerns about their ability to meet regulatory capital requirements.

The role of the Securities and Futures Commission (SFC) in Hong Kong is multifaceted, encompassing the regulation and oversight of various market participants to ensure market integrity and investor protection. Statement I is correct because the SFC is indeed responsible for administering the laws governing the securities and futures markets in Hong Kong. This includes enforcing regulations related to market misconduct, licensing intermediaries, and supervising market operations. Statement II is also correct as the SFC’s mandate includes supervising the activities of various market participants, such as brokers, investment advisors, and fund managers, to ensure compliance with regulatory requirements and ethical standards. Statement III is incorrect because while the SFC aims to maintain market stability, the Hong Kong Monetary Authority (HKMA) is primarily responsible for currency stability and the overall stability of the financial system. The SFC focuses on the securities and futures markets. Statement IV is incorrect because while the SFC protects investors, custodians are the agents holding and safeguarding securities on behalf of individuals, financial institutions, corporations, etc. Therefore, the SFC does not directly hold and safeguard securities on behalf of investors; this function is performed by custodians under regulatory oversight.

Segregation of duties is a fundamental principle in risk management and internal control within financial institutions, including securities firms. It involves dividing responsibilities among different individuals or departments to prevent errors, fraud, and conflicts of interest. In the context of securities transactions, the dealing (order execution) and settlement functions should be separated. This separation ensures that no single individual has complete control over a transaction from initiation to completion.

An account executive’s primary responsibility is to manage client relationships and execute trades on their behalf. Allowing the same individual to handle settlement introduces several risks. First, it creates an opportunity for errors or fraud in the settlement process, as there is no independent verification of the transaction. Second, it can lead to conflicts of interest, where the account executive might prioritize certain clients or transactions over others. Third, it undermines the firm’s internal controls and increases the risk of regulatory violations.

The Securities and Futures Commission (SFC) emphasizes the importance of robust risk management policies and procedures, including segregation of duties, to protect investors and maintain market integrity. By separating dealing and settlement, firms can enhance transparency, reduce the risk of errors and fraud, and ensure compliance with regulatory requirements. This separation is a critical component of a sound risk management framework and contributes to the overall stability and integrity of the financial system. The other options present scenarios that, while important in other contexts, do not directly address the core principle of segregation of duties in the settlement process.

Warrants offer several advantages to retail investors, primarily related to their leverage and potential for hedging. Statement I is correct because warrants provide gearing, allowing investors to control a larger asset value with a smaller capital outlay, amplifying potential gains (and losses). Statement II is also correct; warrants can be used for hedging purposes, allowing investors to offset potential losses in their existing portfolio by taking a position in warrants that move inversely to their other holdings. Statement III is correct as warrants enable speculation with a smaller outlay, providing market exposure with less capital at risk compared to directly purchasing the underlying asset. Statement IV is also correct because warrants provide market exposure, allowing investors to participate in the potential upside of an underlying asset without committing a large amount of capital. The SEHK’s market-making mechanism, requiring Liquidity Providers (LPs) since January 2002, enhances the liquidity of warrants, mitigating the risk of investors being unable to readily buy or sell them. This regulatory requirement ensures that there are generally enough buyers and sellers in the market, addressing concerns about liquidity risk as outlined in the Listing Rules for derivative warrants.

The Shanghai Stock Exchange (SSE), established in November 1990, holds the distinction of being the first stock exchange in mainland China, with Shanghai recognized as the country’s financial hub. It facilitates trading in A shares, which are exclusively available to local Chinese investors and settled in RMB, and B shares, which are accessible to both individual and institutional foreign investors and settled in US dollars. As of June 2011, the SSE boasted 917 listed companies and a market capitalization of RMB 18,125.1 billion. The increasing influence of Shanghai A shares in the global market is anticipated, driven by China’s continued economic growth. Shenzhen Stock Exchange (SZSE), established in December 1990, also trades in A and B shares. A shares are traded and settled in RMB, while B shares are traded in Hong Kong dollars. As of June 2011, the SZSE had 1,312 listed companies and a market capitalization of RMB 8,296.4 billion. Since June 2001, B shares traded on both the SSE and SZSE have been accessible to mainland Chinese investors who can settle their trades in foreign currencies. However, due to restrictive capital flow policies, listing B shares in mainland China remains relatively less attractive compared to listing in Hong Kong or New York. The key difference lies in the settlement currency for B shares: US dollars in Shanghai and Hong Kong dollars in Shenzhen.

Statement I is correct because the adjusted closing market capitalization reflects the changes made during the adjustment and rebalance process. This ensures the index accurately represents the market value after corporate actions or constituent changes. Statement II is also correct; the FAF (Freefloat Adjustment Factor) ensures that only the portion of a company’s shares available to the public is considered in the index calculation, preventing distortions caused by closely held shares. Statement III is correct as the CF (Capping Factor) limits the influence of any single constituent on the index, promoting diversification and preventing a few large stocks from dominating the index’s performance. Statement IV is correct because the adjustment and rebalancing process aims to maintain the index’s representativeness and investability by reflecting changes in the market and ensuring no single stock unduly influences the index. These adjustments are crucial for the index to accurately track market movements and serve as a reliable benchmark for investment performance, aligning with the principles outlined in the HKSI guidelines for index construction and maintenance. The Securities and Futures Commission (SFC) emphasizes the importance of fair and transparent index methodologies to protect investors and maintain market integrity.

The question explores the concept of hedging downside risk using put options, a strategy commonly employed by investors to protect their portfolios from potential losses. In this scenario, Jose holds a significant number of shares in ABC Company and seeks to mitigate the risk of a price decline. The put option, with its delta, provides a mechanism to offset losses in the stock holding. The delta of a put option indicates the change in the option’s price for every $1 change in the underlying asset’s price. A negative delta, as in this case (-0.6), signifies an inverse relationship; as the stock price decreases, the put option’s value increases. The calculation involves determining the number of put option contracts needed to hedge the stock position effectively. This is achieved by considering the total shares held, the delta of the put option, and the lot size of each option contract. The formula used is: Number of put options required = (Total shares on hand) / (Delta × Lot size of each option). In this case, it translates to 1,200 / (-0.6 * 200) = -10. The negative sign indicates that Jose needs to purchase put options to hedge his long stock position. The concept of gamma is also relevant, as it measures the rate of change in delta, reflecting the option’s sensitivity to changes in the underlying stock price. Understanding these concepts is crucial for effective risk management in securities trading, as outlined in guidelines and regulations by the Hong Kong Securities and Futures Commission (SFC).

Custodians play a vital role in safeguarding assets and providing administrative support, while share registrars focus on maintaining shareholder records and facilitating share transactions. HKEx, as the exchange controller, oversees the operation of the securities market, ensuring fairness and efficiency. Understanding the distinct functions of each entity is crucial for navigating the Hong Kong financial landscape. Custodians, according to regulatory guidelines such as those outlined by the Securities and Futures Commission (SFC), are expected to maintain a high level of diligence in protecting client assets. Share registrars must adhere to the Companies Ordinance and listing rules of the SEHK to ensure accurate record-keeping and timely communication with shareholders. HKEx operates under the Securities and Futures Ordinance, which empowers it to regulate market participants and enforce compliance. The merger of SEHK, HKFE, and HKSCC into HKEx was a strategic move to enhance competitiveness and streamline operations, reflecting the evolving dynamics of the global financial market. Therefore, understanding the roles and responsibilities of custodians, share registrars, and HKEx is essential for anyone involved in the Hong Kong securities industry.

Statement I is correct because without margin financing, Jerry’s maximum possible loss is limited to his initial investment of $200,000. Statement II is correct because the return on investment is calculated as the profit divided by the initial investment. In this case, the profit is ($55 – $50) * 20,000 = $100,000, and the initial investment is $200,000. Therefore, the return on investment is $100,000 / $200,000 = 50%. Statement III is incorrect because if the share price drops to $48, Jerry’s loss would be ($50 – $48) * 20,000 = $40,000. The return on investment would be -$40,000 / $200,000 = -20%. Statement IV is incorrect because without margin financing, Jerry’s maximum borrowing capacity is not relevant as he is not borrowing any funds. The maximum borrowing capacity is only applicable when margin financing is used, and it’s calculated based on the margin requirements and the value of the securities. The Securities and Futures Ordinance (SFO) and related guidelines from the Hong Kong Securities and Futures Commission (SFC) govern margin financing activities, emphasizing the need for intermediaries to assess clients’ financial capabilities and risk tolerance before extending margin loans. This ensures investor protection and market stability.

The principle of segregation of duties is a cornerstone of internal control within financial institutions, including securities firms. It mandates that different individuals or departments handle distinct stages of a transaction to prevent errors, fraud, and conflicts of interest. In the context of securities transactions, separating the dealing (order execution) and settlement functions is crucial. An account executive’s primary responsibility lies in managing client relationships and executing trades on their behalf. Allowing the same individual to handle settlement introduces the risk of manipulation, unauthorized transactions, and potential misappropriation of funds.

Risk management, as emphasized by the SFC’s guidelines, encompasses various aspects, including credit, market, and liquidity risks. While an account executive plays a role in understanding a client’s investment objectives and risk tolerance, the actual risk management procedures are typically handled by specialized departments within the firm. These departments employ sophisticated systems and models to assess and mitigate risks across the organization. Therefore, while account executives contribute to the overall risk assessment process, they should not be solely responsible for it.

Therefore, only statement IV is correct. The other statements are incorrect because they violate the principle of segregation of duties and misrepresent the role of an account executive in risk management.