HKSI Paper 9: 70 Key Concepts and Study Guide
Welcome to your revision companion for HKSI Licensing Examination Paper 9, the derivatives paper. This guide breaks the official syllabus (effective from 1 February 2025) into 70 distinct, digestible concepts, arranged in the same topic order you will find in the official study materials. Whether you are meeting futures, swaps and options for the first time or refreshing knowledge you already use at work, having the whole syllabus laid out as a checklist makes it much easier to see what you know well and what still needs attention.
Use these 70 concepts to work through product mechanics, Hong Kong derivatives markets, strategies, pricing and the infrastructure behind trading and clearing. Each explanation comes with an original example and a self-check. The official Paper 9 study guide is version 3.6 for examinations from 6 July 2026; the linked public syllabus is labelled 3.5, so use the current study guide for full examinable detail.
Exam format: HKSI examination overview . Latest published pass rate: 64.29% (Jul 2026) . A pass rate is a past result for a group of candidates, not your required score.
How to use these 70 concepts
- Work through the six topics in the order given, matching the official syllabus. Tick off each of the 70 concepts only when you could explain it aloud, or answer a straightforward question on it, without peeking at your notes.
- For concepts involving prices, values and strategies (index futures pricing, HIBOR futures, option pay-offs, hedging examples), do not just read - actually work the numbers yourself with a calculator and check your arithmetic, units and signs as you go.
- Revisit this outline at the start and end of each study session. Anything left unticked after two passes is your revision priority list for the next session.
The practice examples are original and hypothetical unless explicitly identified as a published case. The concept count is a revision structure; it does not represent official question frequency or topic weighting.
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Topic 1: Overview of the Derivatives Markets
Start with the foundations: what derivatives are, how exchange-traded and over-the-counter markets differ, why hedgers, speculators and arbitrageurs trade, and how Swap Connect links mainland and Hong Kong markets.
1. What a derivative is
A derivative is a financial contract whose value is derived from an underlying asset, rate or index, such as a stock, a share index, an interest rate, a currency or a commodity. The buyer and seller agree terms today, but the payoff depends on how the underlying moves in the future.
Example. Assume Mina pays HK$2 for an option giving the right to buy one share (assumed price HK$50) at HK$52 in one month. The option's value moves with the share price, not with Mina's own cash.
Watch out. Thinking a derivative means owning the underlying asset. It is a contract with rights or obligations about the underlying, not the asset itself.
Self-check: if a contract's payoff depends entirely on the future level of a stock index, what is it and what is its underlying?
Answer: It is a derivative; the underlying is the stock index.
2. Exchange-traded derivatives and how those markets work
Exchange-traded derivatives are standardised contracts traded on an organised exchange, with set contract sizes, expiry dates and delivery terms. A clearing house stands between buyers and sellers, and margin is collected daily to reduce counterparty risk.
Example. Assume Ada buys one standardised index futures contract on an exchange. Because terms are standard, she can close the position by selling an identical contract, and the clearing house novates both trades.
Watch out. Assuming exchange contract terms can be negotiated with the counterparty. Only price and quantity are chosen; the contract specifications are fixed.
Self-check: why does a standardised exchange contract make it easy to exit a position before expiry?
Answer: Because standardised terms let you offset by taking the opposite position in an identical contract.
3. Over-the-counter derivatives and how that market works
OTC derivatives are privately negotiated contracts between two parties, so terms such as notional amount, maturity and underlying can be customised. Because there is generally no clearing house between the parties unless the trade is centrally cleared, each party faces counterparty credit risk on the other.
Example. Assume a company and a bank sign a bespoke two-year interest-rate swap exchanging fixed for floating payments on HK$50,000,000. If the bank fails, the company's hedge is disrupted.
Watch out. Assuming all OTC trades are cleared or guaranteed like exchange trades. Bilateral OTC trades carry counterparty risk unless a central counterparty is used.
Self-check: what is the main advantage of OTC derivatives over exchange-traded ones, and the main extra risk?
Answer: Customisation is the advantage; counterparty credit risk is the extra risk.
4. The derivatives market in Hong Kong
Hong Kong's exchange-traded derivatives trade on the futures and options markets operated under HKEX, with products such as index futures and options, stock futures and options, and currency and commodity contracts. Trades are cleared through the exchange's clearing infrastructure, which manages margin and settlement.
Example. Assume a dealer buys a Hang Seng Index futures contract for a client on the Hong Kong futures market, and the position is margined and cleared daily through the exchange's clearing house.
Watch out. Treating HKEX and the futures exchange as identical entities. HKEX is the group operator; the Hong Kong Futures Exchange is where futures trade, and a separate clearing corporation clears them.
Self-check: who collects margin and guarantees settlement of an exchange-traded futures position in Hong Kong?
Answer: The exchange's clearing house (HKCC), not the trading counterparty on the floor.
5. Major overseas derivatives markets
Major derivatives trade on overseas exchanges such as CME Group in the United States, ICE, Eurex in Europe and others in Asia, each with its own contracts, clearing arrangements and trading hours. Hong Kong participants dealing on these markets must follow those venues' rules as well as Hong Kong requirements.
Example. Assume a Hong Kong client asks for exposure to US Treasury futures. The dealer routes the order to the relevant US exchange and must apply that exchange's contract and clearing rules.
Watch out. Assuming Hong Kong rules alone govern a trade executed on an overseas exchange, or that overseas products are automatically available to Hong Kong clients.
Self-check: a trade is executed on a European exchange by a Hong Kong client. Whose market rules govern the trade?
Answer: The overseas exchange's own rules apply to the trade, alongside Hong Kong requirements for the client relationship.
6. The four basic types: futures, forwards, swaps and options
Futures and forwards both oblige the parties to trade an underlying at a set price on a future date; futures are standardised and exchange-traded, while forwards are customised OTC contracts. Swaps exchange streams of cash flows, and options give the buyer the right, but not the obligation, to buy or sell at a set price in return for a premium.
Example. Assume Ben pays a HK$3 premium for a right to buy at HK$100. If the share is HK$90 at expiry he can walk away, losing only HK$3; a futures buyer would still be bound to buy at HK$100.
Watch out. Confusing rights with obligations. An option buyer may choose not to exercise; a futures or forward party must perform unless the position is closed out.
Self-check: which of the four types gives its buyer a choice rather than an obligation?
Answer: Options; futures, forwards and swaps create binding obligations (subject to closing out).
7. Hedging and asset switching with derivatives
Hedging uses a derivative to offset existing price risk, so losses on one position are largely cancelled by gains on the other. Asset switching uses derivatives to move exposure quickly from one market or asset class to another without selling the underlying holdings.
Example. Assume a fund holds HK$10,000,000 of index-tracking shares and sells index futures of matching notional value. If the index falls 5%: the shares lose HK$10,000,000 × 5% = HK$500,000, while the short futures gains about HK$500,000, leaving a small net result before costs.
Watch out. Believing a hedge guarantees an exact offset. Basis differences, contract rounding and costs usually leave a residual result, and hedging sacrifices upside.
Self-check: a manager wants exposure shifted from equities to bonds without selling stock holdings. Which use of derivatives is this?
Answer: Asset switching, not hedging, because the aim is changing exposure rather than offsetting risk.
8. Participants: hedgers, speculators and arbitrageurs
Hedgers trade to reduce risk they already hold, speculators deliberately take on price risk hoping for profit, and arbitrageurs seek to profit from price differences between markets for little or no net risk. All three groups are needed: hedgers supply risk, and speculators and arbitrageurs provide the liquidity that absorbs it.
Example. Assume a share trades at HK$100 while the index-implied fair futures value is HK$100.80. An arbitrageur buys the share and sells the futures, locking in about HK$0.80 per share before funding and transaction costs.
Watch out. Assuming arbitrage is literally risk-free in practice. Execution delays, funding costs and financing gaps can erode the locked-in spread.
Self-check: a trader with no underlying position buys futures purely because she expects prices to rise. Which participant is she?
Answer: A speculator, because she takes on new price risk for potential profit rather than offsetting an existing exposure.
9. Swap Connect: mechanism and functions
Swap Connect links Mainland and Hong Kong interest-rate swap infrastructure. Northbound Swap Connect gives eligible Hong Kong and overseas investors access to Mainland interbank interest-rate swaps, helping them manage interest-rate risk on onshore exposures. Trading and clearing operate through the scheme's recognised arrangements; do not confuse the direction with an investor from the Mainland buying a Hong Kong product.
Example. Assume an offshore institutional investor wants to hedge the interest-rate risk on its mainland bond holdings. Through the northbound link it can trade mainland interbank interest-rate swaps to fix its effective rate, with clearing through the recognised clearing arrangements linked to the scheme.
Watch out. Northbound describes access into the Mainland market. Do not reverse the direction or assume that every direction or product mentioned in a market-access design is already available.
Self-check: what is the primary function of Swap Connect for market users?
Answer: It gives eligible offshore investors access to Mainland interest-rate swaps through Northbound Swap Connect, supporting management of interest-rate risk.
Topic 2: Generic Derivative Products
The product toolkit that everything else builds on. Master the features of futures, forwards, swaps and options, pay-off diagrams, option pricing models, risk measurement, and how trading strategies such as straddles, strangles and spreads work.
10. Features of a futures product
A futures contract is a standardised, exchange-traded agreement to buy or sell an underlying asset at a fixed price on a future date. Standardisation covers quantity, quality, delivery month and settlement, and the clearing house guarantees performance through margining. Positions can be closed by taking an offsetting trade, so most contracts never reach delivery.
Example. Assume you buy one hypothetical futures contract at 20,000 index points with a HK$50 multiplier. If the index closes at 20,100, your mark-to-market gain is (20,100 − 20,000) × 50 = HK$5,000, credited via daily settlement.
Watch out. Confusing futures with forwards: futures are standardised and exchange-cleared with daily margin; forwards are bespoke bilateral contracts. Also, do not assume you must take delivery — offsetting is normal.
Self-check: A trader buys a futures contract at 20,000 and the next day it settles at 19,900 (multiplier HK$50). What happens?
Answer: The position is marked to market: (19,900 − 20,000) × 50 = −HK$5,000, debited from the margin account, which may trigger a margin call.
11. Futures spread strategies
A futures spread means holding a long position in one contract and a short position in a related contract simultaneously — for example, different expiry months of the same index (a calendar spread) or two related products. Because the two legs tend to move together, the net exposure and margin requirement are usually lower than an outright position. The trader profits from the change in the price difference between the legs, not from the market's overall direction.
Example. Assume a hypothetical near-month contract trades at 20,000 and the far-month at 20,100. You buy the near and sell the far. If the gap narrows from 100 to 60 points (multiplier HK$50), the gain is (100 − 60) × 50 = HK$2,000.
Watch out. Treating a spread as direction-neutral in every sense: a calendar spread still carries risk if the curve moves against you, and the legs are not perfectly correlated.
Self-check: You buy near-month at 20,000 and sell far-month at 20,080. The gap widens to 120 points. What is the result (multiplier HK$50)?
Answer: The gap moved from 80 to 120 against you: (120 − 80) × 50 = HK$2,000 loss on the spread.
12. Features of a forward product
A forward is a bespoke, bilateral agreement to buy or sell an asset at a price fixed today for settlement on a future date, with terms (amount, date, asset) negotiated between the parties. Unlike futures, forwards are OTC contracts with no clearing house, no daily mark-to-market, and settlement typically only at maturity. This flexibility brings counterparty credit risk, since each party relies on the other to perform.
Example. Assume an exporter locks in a hypothetical forward rate of 7.80 (HKD per USD) to sell US$1,000,000 in three months. At maturity the spot rate is 7.70, so the forward saves (7.80 − 7.70) × 1,000,000 = HK$100,000 versus dealing at spot.
Watch out. Saying forwards have no credit risk or that they are marked to market daily like futures — the opposite is true. Forwards are customised; futures are standardised.
Self-check: Under a forward to buy EUR at a hypothetical 8.50 HKD/EUR, spot at maturity is 8.65 for EUR 500,000. Who benefits?
Answer: The buyer: (8.65 − 8.50) × 500,000 = HK$75,000 saved versus buying at spot, showing the forward's hedging value.
13. Features of a swap
A swap is an OTC agreement between two parties to exchange streams of cash flows over time, calculated on a notional principal that itself is usually not exchanged. In the classic interest-rate swap, one party pays a fixed rate and receives a floating rate (or vice versa) on the same notional. Swaps let each party transform its exposure — for example, converting floating-rate borrowing into fixed-rate cost for certainty.
Example. Assume a company pays fixed 3% and receives floating on a hypothetical notional of HK$10,000,000. If the floating rate averages 3.8% for the year, the company receives 0.8% × 10,000,000 = HK$80,000 net.
Watch out. Thinking the notional principal changes hands at the start or end of a plain vanilla swap — only the interest difference is exchanged. Also, swaps are OTC and customised, not exchange-traded.
Self-check: In a fixed-for-floating swap, notional HK$20,000,000, fixed 2.5%, floating averages 2.1%. What does the fixed payer pay or receive?
Answer: The fixed payer pays the difference: (2.5% − 2.1%) × 20,000,000 = HK$80,000 net to the counterparty.
14. Credit default swaps
A credit default swap (CDS) is a bilateral contract in which a protection buyer pays a periodic premium to a protection seller in exchange for a payment if a defined credit event occurs on a reference entity, such as bankruptcy or failure to pay. It works like insurance on credit risk, though it is a derivative contract. The buyer may hold the underlying bond or simply be transferring credit exposure.
Example. Assume a fund buys protection on a hypothetical notional of HK$5,000,000 for a premium of 1% per year. If a credit event occurs, the seller compensates the loss on the notional; if no event occurs, the fund has paid 1% × 5,000,000 = HK$50,000 for the protection.
Watch out. Describing a CDS as a bond or as insurance regulated like an insurance policy — it is a derivative. Also, protection buyers do not need to own the reference bond.
Self-check: A CDS protects HK$2,000,000 notional at a 2% annual premium. What is the yearly cost if no credit event occurs?
Answer: 2% × 2,000,000 = HK$40,000 paid by the protection buyer, with no contingent payment due.
15. Features of an option
An option gives the buyer the right, but not the obligation, to buy (a call) or sell (a put) an underlying at the strike price, in exchange for a premium paid to the seller (writer). The buyer's maximum loss is the premium; the writer takes on potentially large obligations in return for keeping the premium. American options can be exercised any time up to expiry, while European options only at expiry.
Example. Assume you buy a hypothetical call with strike 100 for a premium of 3. At expiry the underlying is 112. Intrinsic value is 112 − 100 = 12, so profit is 12 − 3 = 9 per unit. If the underlying finished at 95, you would not exercise and lose only the 3 premium.
Watch out. Mixing up buyer and writer: the buyer pays the premium and has rights; the writer receives the premium and has obligations. Also, do not say option buyers must exercise — they can let options lapse.
Self-check: You write a hypothetical put, strike 50, premium 2. Underlying expires at 44. Your result per unit?
Answer: The put is exercised against you: loss is (50 − 44) − 2 = 4 per unit, since you must buy at 50 what is worth 44, less the 2 premium kept.
16. Option markets
Options trade both on exchanges and over the counter. Exchange-traded options are standardised (strike, expiry, contract size), cleared through a clearing house, and margined; OTC options are customised between counterparties. In Hong Kong, exchange-traded stock options are subject to the exchange's rules, and liquidity is supported by arrangements such as market makers or liquidity providers.
Example. Assume a corporate wants a hypothetical customised option on an unusual basket with a bespoke expiry — an OTC option fits. A retail trader wanting a standardised single-stock option with exchange clearing would use the listed market instead.
Watch out. Assuming all options are exchange-traded and margined, or that OTC options carry no counterparty risk. Remember the two markets differ in standardisation, clearing and credit exposure.
Self-check: Which market suits a client needing a non-standard strike and expiry with a single known counterparty?
Answer: The OTC market, because terms are negotiated bilaterally — accepting counterparty credit risk in exchange for customisation.
17. Pay-off diagrams
A pay-off diagram plots profit or loss against the underlying price at expiry. A long call's pay-off is flat at minus the premium below the strike, then rises one-for-one above it; a long put is flat below the strike and falls as the underlying rises. Breakeven for a bought call is strike plus premium; for a bought put, strike minus premium.
Example. Assume a hypothetical call, strike 100, premium 4. Breakeven is 100 + 4 = 104. At expiry 110, profit is 110 − 104 = 6; at 98, loss is the full 4 premium.
Watch out. Drawing the writer's pay-off as the same as the buyer's — the writer's diagram is the mirror image, with maximum gain equal to the premium. Also, forgetting to include the premium in breakeven calculations.
Self-check: A hypothetical put, strike 80, premium 3. What is the breakeven and the maximum loss for the buyer?
Answer: Breakeven is 80 − 3 = 77; maximum loss is the 3 premium, occurring at any expiry price at or above 80.
18. Option trading strategies: the building blocks
Complex option strategies are combinations of four basic positions: long call, short call, long put and short put, sometimes combined with the underlying. Each has a distinct risk–reward shape: buyers pay premiums for potentially large gains with limited loss; writers collect premiums but accept potentially large losses. Understanding each building block's pay-off lets you construct and read any multi-leg strategy.
Example. Assume a trader expects a hypothetical stock to stay near 100. Writing a call (strike 100, premium 3) and a put (strike 100, premium 3) collects 6 total; profit is the full 6 if the stock expires exactly at 100.
Watch out. Memorising strategy names without the pay-off logic — exam questions test whether you can work out profit, loss and breakevens from the legs. Always net the premiums across legs.
Self-check: You buy a hypothetical call (premium 3) and sell a call at a higher strike (premium 1), same expiry. What is your maximum loss?
Answer: Net premium paid is 3 − 1 = 2, which is also the maximum loss; this is a bull call spread (covered under spreads below).
19. Straddles and strangles
A long straddle buys a call and a put with the same strike and expiry, profiting from a large move in either direction; a long strangle buys a call and a put at different strikes (call above, put below), costing less but needing a bigger move to profit. Both lose if the underlying stays still, because time value decays. The writer of these strategies profits from stability but faces potentially large losses on big moves.
Example. Assume a hypothetical long straddle: call strike 100 (premium 4) and put strike 100 (premium 3), total cost 7. Breakevens are 100 + 7 = 107 and 100 − 7 = 93. At expiry 115, profit is 115 − 107 = 8.
Watch out. Using the same strike for a strangle — a strangle's strikes differ. Also, forgetting that a straddle has two breakevens, one on each side of the strike.
Self-check: Hypothetical long strangle: put strike 95 (premium 2), call strike 105 (premium 2). What are the breakevens?
Answer: The two premiums total 4. The lower breakeven is 95 - 4 = 91 and the upper breakeven is 105 + 4 = 109. At expiry the position loses money between 91 and 109, ignoring fees; use the combined premium for both breakevens.
20. Option spreads
An option spread combines a long option and a short option of the same type on the same underlying. A bull call spread buys a lower-strike call and sells a higher-strike call, capping both cost and maximum gain; a bear spread is the mirror image using puts or calls. Vertical spreads share one expiry; calendar spreads use different expiries. Spreads limit risk in exchange for limiting profit.
Example. Assume a hypothetical bull call spread: buy call strike 100 (premium 4), sell call strike 110 (premium 1), net cost 3. Maximum gain is (110 − 100) − 3 = 7 if the underlying finishes at or above 110; maximum loss is the 3 net premium.
Watch out. Forgetting that both maximum profit and maximum loss are capped in a vertical spread — the short leg gives up upside. Also, mixing up which strike is bought in a bull call spread (buy the lower strike).
Self-check: In the spread above, the underlying expires at 105. What is the profit?
Answer: The 100 call is worth 5, the 110 call expires worthless: (5 − 3) = 2 profit, i.e. intrinsic value 5 minus net cost 3.
21. Options combined with underlying assets
Options can be paired with the underlying asset to shape a risk profile. A covered call — holding the asset and writing a call against it — generates premium income but caps upside above the strike. A protective put — holding the asset and buying a put — acts like insurance, limiting downside to the strike less the premium while keeping upside. These combinations are core hedging structures.
Example. Assume you hold a hypothetical stock at 100 and buy a put, strike 95, premium 2. If the stock falls to 80, the stock loses 20 but the put pays 15, so the net loss is 20 - 15 + 2 = 7 - the maximum loss, equal to (100 - 95) + 2.
Watch out. Thinking a covered call protects against a price fall — it only cushions the loss by the premium received; downside remains largely unhedged. The protective put is the downside hedge.
Self-check: Hypothetical covered call: stock bought at 100, call strike 105 written for premium 3. Stock expires at 112. Result?
Answer: Stock gain 12, but the call is exercised against you costing 112 − 105 = 7; net profit is 12 − 7 + 3 = 8, showing the capped upside.
22. Option pricing models and risk measurement (the Greeks)
Option value has intrinsic value (in-the-money amount) plus time value, which reflects time to expiry, volatility and other factors. Pricing models such as Black-Scholes value options from inputs including the underlying price, strike, time, volatility and interest rates. Risk is measured by the Greeks: delta (sensitivity to the underlying price), gamma (rate of change of delta), theta (time decay), vega (volatility sensitivity) and rho (interest-rate sensitivity).
Example. Assume a hypothetical option with delta 0.5 on an underlying at 100. If the underlying rises 2 to 102, the option value rises approximately 0.5 × 2 = 1, before gamma and other effects. Theta works the other way: value erodes as expiry approaches, all else equal.
Watch out. Treating delta as constant — it changes as the underlying moves (that is gamma's role). Also, do not assume higher volatility always hurts option value: for buyers, more volatility generally raises option value.
Self-check: A hypothetical option has theta of −0.05 per day and vega of 0.2. Implied volatility rises 3 points with no price change. Net effect per day?
Answer: Vega effect: 0.2 × 3 = +0.6; theta effect: −0.05. Net approximately +0.55, assuming other inputs unchanged.
Topic 3: Equity Derivatives
The broadest topic in the syllabus. Cover the full family of Hong Kong exchange-traded equity derivatives, warrants and their liquidity providers, OTC equity derivatives, the five named structured products, and pricing, hedging and trading applications.
23. Hang Seng Index futures
HSI futures are exchange-traded futures on Hong Kong's benchmark index, cash-settled against a final settlement price calculated as an average of index readings taken at set intervals on the last trading day. A contract's value equals the index level multiplied by a fixed contract multiplier, so small index moves produce meaningful gains or losses.
Example. Assume a multiplier of HK$50 per index point and the index at 20,000. One contract controls 20,000 x 50 = HK$1,000,000 of exposure. A fund holding a HK$1,000,000 portfolio can hedge it by selling one contract.
Watch out. Assuming index futures are physically delivered. They settle in cash against the index, so no shares change hands at expiry.
Self-check: Index 20,000, assumed multiplier HK$50: how many contracts hedge a HK$2,000,000 portfolio?
Answer: Each contract = 20,000 x 50 = HK$1,000,000, so sell 2 contracts.
24. Hang Seng Index options
HSI options give the buyer the right, not the obligation, to take a cash-settled index position at the strike. The buyer's loss is capped at the premium; the seller collects premium but faces potentially large losses. Premiums are quoted in index points.
Example. Assume a multiplier of HK$50. Buying a call at a premium of 300 points costs 300 x 50 = HK$15,000. If the index finishes 500 points above the strike, the intrinsic value is 500 x 50 = HK$25,000, a net profit of HK$10,000.
Watch out. Forgetting to multiply the quoted premium by the contract multiplier when working out the cash cost.
Self-check: Premium 200 points, assumed multiplier HK$50: what does one put cost?
Answer: 200 x 50 = HK$10,000.
25. Mini-Hang Seng Index futures and options
Mini contracts track the same HSI but use a smaller contract multiplier, so each contract represents a fraction of the full-size exposure. This lets smaller investors hedge or speculate precisely and lets traders fine-tune position sizes.
Example. Assume the mini multiplier is one-fifth of the full multiplier. With the index at 20,000 and an assumed mini multiplier of HK$10, one mini contract = 20,000 x 10 = HK$200,000. A HK$200,000 exposure is hedged with exactly one mini contract.
Watch out. Thinking minis trade a different index or have different expiry months. The underlying index is the same; only the contract size differs.
Self-check: Why might a trader use 5 mini contracts instead of 1 full contract?
Answer: Same total exposure but greater flexibility to adjust the position in smaller increments.
26. Hang Seng China Enterprises Index futures and options
HSCEI contracts track mainland enterprises listed in Hong Kong, giving focused exposure to that segment rather than the whole market. They are used to hedge H-share-type portfolios or to express views on mainland-related listings separately from the broad HSI.
Example. Assume a multiplier of HK$50 and the HSCEI at 10,000. One contract = 10,000 x 50 = HK$500,000. A fund with a HK$500,000 mainland-enterprise portfolio sells one HSCEI futures contract as a hedge.
Watch out. Mixing up the HSCEI with the HSI, or assuming it covers A-shares traded on mainland exchanges. It tracks mainland-related companies listed in Hong Kong.
Self-check: Which index should hedge a portfolio concentrated in mainland enterprises listed in Hong Kong?
Answer: The HSCEI, because its constituents match that market segment more closely than the HSI.
27. Stock futures
Stock futures use a single company's shares as the underlying. HKEX's Hong Kong stock futures are cash-settled: the contract difference is paid in money and no shares are delivered at expiry. The current contract summary uses the underlying stock's official SEHK closing price on the last trading day as the final settlement price. Do not confuse this with stock options or another market's contract.
Example. Assume a hypothetical one-share contract multiplier, 10,000 shares bought at HK$100, and 10,000 matching stock futures sold at HK$100. If the final share and settlement price is HK$99, the shares lose HK$10,000 and the short futures gain (100 - 99) x 10,000 = HK$10,000. This simplified hedge ignores fees and basis differences.
Watch out. Assuming Hong Kong stock futures are physically delivered like some overseas single-stock futures. HKFE stock futures are cash-settled; the distinguishing feature versus index futures is the single-stock underlying, not the settlement method.
Self-check: What happens at expiry if you are short HKEX stock futures and do not close out?
Answer: The position is cash-settled against the final settlement price - a cash payment, with no delivery of shares.
28. Stock options
Stock options are options on individual shares, exercised into actual share delivery. A covered call writer owns the shares backing the short call, earning premium while giving up upside above the strike. Uncovered writers face substantial risk if the share rallies.
Example. An investor owns 1,000 shares at HK$50 and sells 1,000 calls at a HK$2 premium, collecting 1,000 x 2 = HK$2,000. If the share rises to HK$60, the shares are called away at the strike, capping the gain but keeping the premium.
Watch out. Writing calls without owning the shares and underestimating the loss if the share price surges above the strike.
Self-check: What does the writer of a covered call give up?
Answer: Upside above the strike, in exchange for the premium received.
29. Dividend futures
Dividend futures have an index's expected future dividends as their underlying, not the index level. They let investors hedge or speculate on dividend outcomes separately from share prices, which is useful when dividends are uncertain.
Example. Assume a multiplier of HK$50 per point. An investor expects dividends to be cut and sells the dividend future at 800 points. Dividends are later confirmed at 700 points, so the short gains 100 x 50 = HK$5,000, even if the index itself was flat.
Watch out. Treating dividend futures as a bet on the index level. The underlying is the stream of dividends, which can move independently of prices.
Self-check: You expect stable prices but lower dividends. Which product fits?
Answer: Short dividend futures, since the dividend component is the underlying.
30. HSI Volatility Index futures
These futures are based on the HSI Volatility Index, which reflects implied volatility from HSI options prices. They give direct exposure to expected market turbulence, rising when investors anticipate larger swings and falling in calm markets.
Example. Assume a multiplier of HK$50 per point. Expecting an event to stir turbulence, a trader buys at a volatility level of 20. The level rises to 28, giving a gain of 8 x 50 = HK$400 per contract, even if the HSI itself barely moved.
Watch out. Assuming the volatility future tracks the HSI level. It tracks expected volatility, which can rise whether the market crashes or rallies sharply.
Self-check: The HSI is flat but option prices imply bigger swings. What happens to the volatility index?
Answer: It rises, because it measures implied volatility, not the direction or level of the index.
31. CES China 120 Index futures
These futures track a broad index of around 120 mainland-related companies, spanning different listing types and providing wider China exposure than narrower indices. They suit investors wanting diversified mainland exposure through a single exchange-traded contract.
Example. Assume a multiplier of HK$50 and the index at 4,000. One contract = 4,000 x 50 = HK$200,000. An investor wanting broad China exposure across many large mainland-related names buys one futures contract instead of assembling dozens of individual positions.
Watch out. Confusing this broad index with the HSCEI. The two cover different constituent sets and breadth, so they are not interchangeable hedges.
Self-check: Why choose a broad 120-stock China index future over an HSCEI future?
Answer: For wider, more diversified mainland-related exposure beyond the HSCEI's constituent set.
32. MSCI Equity Indexes futures and options
HKEX lists futures and options on selected MSCI equity indexes, which are regional or country benchmarks compiled by MSCI rather than Hang Seng. They allow exposure to markets or regions outside the local Hang Seng product family.
Example. A Hong Kong-based fund wants regional exposure beyond Hong Kong. It buys futures on an MSCI regional index, assuming a notional of US$100 per index point and the index at 2,000, giving 2,000 x 100 = US$200,000 of exposure per contract.
Watch out. Assuming all index derivatives in Hong Kong are on Hang Seng indexes. MSCI products are based on a different index provider's benchmarks.
Self-check: Whose benchmarks underlie MSCI index futures?
Answer: MSCI's own regional and country indexes, not the Hang Seng family.
33. Hang Seng TECH Index futures and options
These contracts track the Hang Seng TECH Index, focused on major technology companies listed in Hong Kong. They let investors hedge or take positions in the technology segment without trading each constituent separately.
Example. Assume a multiplier of HK$50 and the TECH index at 4,000, so one contract = HK$200,000. A client holds HK$300,000 of tech shares. Selling one contract under-hedges; selling two gives HK$400,000, slightly over-hedging. The trader must choose and document the rounding.
Watch out. Forgetting that hedge ratios rarely match exactly, so rounding up or down leaves a deliberate under- or over-hedge that should be recognised.
Self-check: Exposure HK$300,000, contract value HK$200,000: what are the hedge options?
Answer: Sell 1 contract (under-hedge) or 2 (over-hedge); a perfect hedge is impossible with whole contracts.
34. Hang Seng Index Futures Options
These are options on HSI futures contracts, not on the index itself. Exercising a call gives the holder a long futures position at the strike; exercising a put gives a short futures position. This differs fundamentally from cash-settled index options.
Example. A trader buys an HSI futures call with strike 20,200. The futures price rises to 20,500 and the trader exercises, obtaining a long futures position at 20,200, marked 300 points in his favour, with the position still open to manage or close.
Watch out. Confusing futures options with index options. On exercise you receive a futures position, not an immediate cash settlement of intrinsic value.
Self-check: What do you receive on exercising a put on HSI futures?
Answer: A short futures position at the strike price.
35. Warrants: features, types and reasons for investing
A warrant is the right to buy (call) or sell (put) an underlying at a set price within a period. Derivative warrants are issued by third-party issuers; company warrants are issued by the company itself, often over its own shares. Buyers use them for leveraged views with loss limited to the premium.
Example. Assume a hypothetical call warrant entitles its holder to one share. The share is HK$10 and the warrant HK$0.50, giving simple gearing of 10 / (0.50 x 1) = 20 times. A different entitlement ratio changes this calculation. Simple gearing also differs from effective gearing, which incorporates delta.
Watch out. Confusing company warrants with derivative warrants, and forgetting that warrants lose value over time even if the underlying stands still.
Self-check: Share HK$10, warrant HK$0.50: what is the simple gearing?
Answer: 10 / 0.50 = 20 times.
36. The Hong Kong warrant market, issuance and liquidity providers
Derivative warrants are listed and traded on the stock exchange, issued by eligible issuers rather than the underlying company. Liquidity providers quote two-way prices to support trading, but the quality of that quoting can vary with market conditions.
Example. A warrant shows bid HK$0.48 and ask HK$0.50 in normal conditions. During a sharp market fall the liquidity provider widens its quotes, so an investor exiting pays a wider spread, an implicit cost on top of the price move.
Watch out. Assuming liquidity providers guarantee unlimited trading at tight spreads in all conditions. Spreads can widen and quoted sizes can shrink when markets are stressed.
Self-check: Who issues derivative warrants in Hong Kong?
Answer: Third-party eligible issuers, not the underlying company.
37. OTC equity derivatives: equity-linked debt investments, equity swaps, OTC options and warrants
OTC equity derivatives are privately negotiated bilateral contracts, so terms like notional, maturity and underlying can be customised. Common structures include equity-linked debt investments, equity swaps exchanging equity returns for a financing leg, and bespoke options and warrants.
Example. A fund enters an equity swap on HK$10,000,000 notional, receiving the stock's total return and paying a floating rate of 3%. The stock returns 8%, so the fund nets 8% - 3% = 5%, or 10,000,000 x 5% = HK$500,000, without holding the shares.
Watch out. Assuming OTC contracts are standardised or centrally guaranteed like exchange products. Terms are negotiated and counterparty risk must be managed.
Self-check: Key difference between an OTC equity swap and an exchange-traded future?
Answer: The swap is customised and bilateral with counterparty risk; the future is standardised and exchange-cleared.
38. Structured products I: equity-linked notes and callable range accrual notes
An equity-linked note pays an enhanced coupon but redemption depends on a reference share: above the strike the investor gets principal back; below it, delivery of shares worth less than principal. A callable range accrual note accrues coupons only while the reference stays within a range, and the issuer can call it early.
Example. Assume a hypothetical HK$100,000 equity-linked note converts at a HK$45 strike and pays HK$1,000 interest. For this simplified calculation, allow fractional shares. If the share ends at HK$40, 100,000 / 45 shares are worth HK$88,888.89. Including interest gives HK$89,888.89, a HK$10,111.11 loss. Real settlement and fractional-share treatment depend on the terms.
Watch out. Viewing ELNs as risk-free deposits. Below the strike the investor receives shares worth less than the amount invested.
Self-check: On a CRAN, when does the coupon accrue and who can end the note early?
Answer: Only while the reference stays within the range; the issuer can call the note early.
39. Structured products II: CBBCs, accumulators and inline warrants
Callable Bull/Bear Contracts are leveraged instruments with a mandatory call feature: if the underlying hits the call level, trading stops immediately and holders receive only any residual value, possibly none. Accumulators oblige the investor to periodically buy shares at a set price unless a knock-out level is hit. Inline warrants pay most when the underlying finishes within a specified range.
Example. A bull CBBC on a HK$100 share has a call level of HK$90 and costs HK$0.20. The share falls to HK$90: a mandatory call event triggers, the investor cannot wait for recovery, and receives only residual value, which may be zero if the price keeps falling.
Watch out. Treating a CBBC like an ordinary option that can be held hoping for a rebound. Once the call level is hit, the position is terminated automatically.
Self-check: An inline warrant profits most when the underlying does what at expiry?
Answer: Finishes within the specified range; large moves either way reduce or eliminate the payout.
40. Pricing, hedging with stock futures and trading strategies for equity derivatives
Index futures prices follow cost-of-carry: fair value equals the spot index plus financing cost minus expected dividends, since futures holders forgo dividends. Hedgers size positions using the value of the exposure relative to contract value, then choose strategies, such as spreads or covered positions, matching their view and risk tolerance.
Example. Assume spot 20,000, financing 3% per year for 3 months, and dividends of 200 points. Fair value = 20,000 + (20,000 x 3% x 3/12) - 200 = 20,000 + 150 - 200 = 19,950 points.
Watch out. Omitting the dividend adjustment. Ignoring it overstates fair value and makes a fairly priced future look cheap or expensive.
Self-check: Spot 20,000, 3% financing for 3 months, 200-point dividends: what is fair value?
Answer: 20,000 + 150 - 200 = 19,950 points.
Topic 4: Interest-Rate Derivatives
Learn how HIBOR futures, forward rate agreements, interest-rate swaps and OTC interest-rate options work, how contract prices and values are determined, and how each can be used to hedge or trade rate expectations.
41. Features of interest-rate derivative products
Interest-rate derivatives have an interest rate or rate-based instrument as their underlying. Their prices generally move inversely to interest rates, because fixed-rate values fall when rates rise. They exist both exchange-traded (HIBOR futures) and over-the-counter (FRAs, swaps, options).
Example. Suppose a company knows its loan rate resets every three months. An interest-rate derivative lets it lock today's rate without borrowing yet, converting floating funding into effectively fixed funding.
Watch out. Do not assume all interest-rate derivatives behave like equity derivatives. The inverse price-rate relationship means a rate rise can be a gain or loss depending on your position.
Self-check: if interest rates rise, does the value of an interest-rate futures position you hold move up or down if you are short?
Answer: Up, because futures prices are quoted inversely to rates.
42. HIBOR futures: contract terms, price and contracted value
HIBOR futures are exchange-traded contracts settled by reference to the Hong Kong Interbank Offered Rate. Prices are quoted as 100 minus the implied interest rate, so a lower rate means a higher price. The contracted value equals the notional face value, and profit or loss follows the change in that quoted price.
Example. Assume a hypothetical contract where each 0.01% (one basis point) move equals HK$30. If the rate falls from 4.00% to 3.80%, the price rises from 96.00 to 96.20, a 20-basis-point gain. A long position gains 20 × HK$30 = HK$600.
Watch out. A common mistake is thinking you buy futures to bet on rates rising. Buying HIBOR futures profits when rates fall, since price is 100 minus the rate.
Self-check: rate moves from 3.25% to 3.50%. Under the same assumed HK$30 per point, what is a short seller's profit?
Answer: A 25-basis-point favourable move x HK$30 per basis point gives HK$750. Keep basis points distinct from whole price points.
43. Forward rate agreements
An FRA is an OTC contract where two parties fix an interest rate today for a future borrowing or deposit period. At the settlement date, cash is exchanged based on the difference between the agreed rate and the prevailing reference rate, on a notional amount. No principal changes hands.
Example. Assume a borrower buys an FRA at 4% on HK$1,000,000 for a three-month period (90/360 days). If settlement rate is 5%, the buyer receives (5% − 4%) × 1,000,000 × 90/360 = HK$2,500, offsetting the higher borrowing cost (discounting ignored for simplicity).
Watch out. Do not forget the period fraction in the settlement formula, and remember the buyer of an FRA is protecting against rates rising, not falling.
Self-check: same FRA but settlement rate is 3.5%. Who pays and how much (ignoring discounting)?
Answer: Buyer pays 0.5% × 1,000,000 × 90/360 = HK$1,250.
44. Interest-rate swaps
An interest-rate swap is an OTC agreement to exchange fixed-rate payments for floating-rate payments on a notional amount over set periods. Only the net difference is settled at each reset date. Swaps convert floating-rate liabilities into fixed ones, or the reverse, and can run for years.
Example. Assume a company pays fixed 4% and receives HIBOR floating on HK$10,000,000 annually. If the floating rate averages 4.8% for the year, the company receives the net 0.8% × 10,000,000 = HK$80,000 from the counterparty.
Watch out. Notional amounts are never exchanged, and each party's net position depends on which leg it pays. Mixing up payer and receiver flips the answer.
Self-check: if floating averages only 3.6%, what is the fixed payer's net position in the example?
Answer: Pays net 0.4% × 10,000,000 = HK$40,000.
45. OTC interest-rate options
OTC interest-rate options give the buyer the right, not the obligation, to transact at a specified rate. Common structures include caps, which limit the maximum floating rate paid, floors, which set a minimum rate received, and swaptions, which are options to enter a swap. Buyers pay a premium for this one-way protection.
Example. Assume a single hypothetical caplet covering a one-year accrual period on HK$5,000,000, with a 4.5% strike. If its reference rate fixes at 6%, the end-period payment is (6% - 4.5%) x HK$5,000,000 x 1 year = HK$75,000 before premium. A shorter accrual period gives a proportionately smaller payment.
Watch out. An option holder must still pay the premium even if the option expires worthless. Also, caps protect borrowers while floors protect lenders or depositors.
Self-check: rates settle at 4.5% exactly on the cap in the example. What does the seller pay?
Answer: Nothing; the excess over 4.5% is zero.
46. Hedging with HIBOR futures and forward rate agreements
A borrower fearing rising rates sells HIBOR futures or buys an FRA, so losses on funding are offset by derivative gains. A lender or depositor fearing falling rates buys futures or sells an FRA instead. FRAs fix one specific period, while futures can be rolled or matched to exposure dates.
Example. Assume a treasurer will borrow HK$1,000,000 in two months. She sells HIBOR futures now. If rates rise from 4% to 5%, the futures price falls from 96 to 95, so her short futures gain offsets the extra HK$10,000 annual interest cost (before basis and discounting adjustments).
Watch out. Hedging in the wrong direction doubles your risk instead of cancelling it. Always ask first: do I lose money when rates rise or when they fall?
Self-check: a depositor expects falling rates. Should it buy or sell HIBOR futures to hedge?
Answer: Buy, so futures gains offset lower deposit income.
47. Trading strategies using HIBOR futures
Traders use HIBOR futures to express views on rate direction or rate-curve relationships. A directional trade buys futures expecting rates to fall, or sells expecting rates to rise. Spread strategies combine different contract months to profit from the gap between implied forward rates changing, with less overall rate-direction risk.
Example. Assume a trader expects short-term rates to fall faster than the market predicts. She buys a near-month contract at a hypothetical 96.00. When rates drop 0.5%, the price rises to 96.50, and she closes out for a profit (using an assumed HK$30 per point, a 50-point move gives HK$1,500).
Watch out. Remember the inverse quoting. Traders new to rates futures often sell when their view actually calls for buying, betting against themselves.
Self-check: you expect HIBOR to rise sharply. What position should you take?
Answer: Sell (go short) HIBOR futures.
Topic 5: Currency and Commodity Derivatives
Two markets in one topic: currency forwards, FX swaps, currency swaps, currency options and non-deliverable forwards, plus commodity groups, commodity derivative types and the exchange-traded products available in Hong Kong.
48. Currency forwards
A currency forward is an OTC agreement to exchange two currencies at a fixed rate on a future date. Unlike a futures contract, terms such as amount and date are negotiated between the parties, and settlement is normally by actual delivery of the currencies.
Example. Assume a HK exporter will receive USD 1,000,000 in 3 months. It locks a forward rate of 7.80 HKD/USD, so it will receive 1,000,000 x 7.80 = HKD 7,800,000 regardless of the spot rate then.
Watch out. Assuming a forward rate is a prediction of the future spot rate. It is simply today's agreed exchange rate for future delivery, derived from interest-rate differentials, not a forecast.
Self-check: a forward locks HKD 7.80 per USD for delivery in 3 months. Does this guarantee the spot rate in 3 months will be 7.80?
Answer: No. It guarantees the contract rate for settlement; the future spot rate may differ, which is exactly why the hedge removes uncertainty.
49. Foreign exchange swaps
An FX swap combines a spot exchange of two currencies with a reverse forward exchange at a later date. It is mainly used to manage short-term liquidity in different currencies or to roll over hedging positions, not to take a directional currency view.
Example. Assume a bank needs HKD for 1 month. It sells USD 1,000,000 spot at 7.80 (receiving HKD 7,800,000) and agrees to buy back the USD in 1 month at 7.8020, paying 1,000,000 x 7.8020 = HKD 7,802,000. The HKD 2,000 difference reflects the interest-rate differential.
Watch out. Confusing an FX swap with a currency swap. An FX swap is two exchanges of principal at two dates; a currency swap typically also involves periodic interest payments in the two currencies over a longer term.
Self-check: in the example, what does the HKD 2,000 extra repayment represent?
Answer: The forward points: the cost of holding the currency for one month, reflecting the interest-rate differential between the two currencies.
50. Currency swaps
A currency swap exchanges principal and interest streams in one currency for those in another over a longer term. Parties may exchange principal at the start and back-exchange at maturity, and periodic interest payments are made in the currency each party has received.
Example. Assume Company A swaps HKD 7,800,000 for USD 1,000,000 at 7.80 for 2 years, paying fixed 3% on USD (USD 30,000 per year) and receiving 2% on HKD (HKD 156,000 per year). At maturity the principals are exchanged back at 7.80.
Watch out. Thinking a currency swap only exchanges principal once. It involves a stream of interest payments, and often principal exchanges at both start and maturity, unlike an FX swap's two single exchanges.
Self-check: In the example, what is Company A's annual net payment in HKD terms, assuming 7.80 throughout?
Answer: Receives HKD 156,000; pays USD 30,000 x 7.80 = HKD 234,000, so a net payment of HKD 78,000 per year.
51. Currency options
A currency option gives the buyer the right, but not the obligation, to exchange one currency for another at a set strike rate. Buyers pay a premium for this right, so they are protected against adverse moves while keeping the benefit of favourable moves.
Example. Assume a buyer holds a USD put/HKD call, strike 7.80, on USD 1,000,000, premium HKD 0.10 per USD (HKD 100,000). If spot moves to 7.60, exercising lets the buyer sell USD at 7.80 instead of the market 7.60, yielding 1,000,000 x (7.80 - 7.60) = HKD 200,000, a net gain of HKD 100,000 after premium.
Watch out. Forgetting the premium in the profit calculation. Unlike a forward, an option's payoff must be reduced by the premium paid, so the breakeven lies beyond the strike in the direction of the favourable move.
Self-check: in the example, at what spot rate at expiry does the buyer just break even?
Answer: Strike minus premium: 7.80 - 0.10 = 7.70; above 7.70 the bought USD put loses money net of premium.
52. Non-deliverable forwards
A non-deliverable forward settles an exchange-rate difference in an agreed settlement currency instead of exchanging the restricted currency. The quote convention, notional currency and settlement formula all matter. When a rate is quoted as local currency per US dollar, a difference calculated in local currency must be converted before calling it a US-dollar payment.
Example. Assume an NDF buyer agrees to buy USD500,000 at 8.00 local-currency units per USD, with cash settlement in USD using the fixing rate. At a fixing of 8.20, the gain is 500,000 x (8.20 - 8.00) = 100,000 local-currency units, or 100,000 / 8.20 = USD12,195.12. No restricted currency is delivered.
Watch out. Assuming NDFs involve delivery of the underlying currency. Delivery never occurs; only the cash difference against the fixing rate is settled, which is the whole point of the product.
Self-check: Using the same hypothetical NDF convention, what happens if the fixing is 7.90 local-currency units per USD?
Answer: The USD buyer pays the counterparty: 500,000 x (8.00 - 7.90) / 7.90 = USD6,329.11. The local-currency difference is converted into USD at the fixing rate.
53. Exchange-traded currency derivative products in Hong Kong
HKFE offers exchange-traded currency futures and options, with USD/CNH (offshore renminbi against US dollar) contracts being the best-known family. Being exchange-traded and cleared, they provide standardised terms, margining and central counterparty protection, unlike bespoke OTC currency forwards.
Example. Assume a trader is long one USD/CNH futures contract. If the contract price falls from 7.2500 to 7.2000 (USD weakening against CNH), the long position loses; a short position gains the difference times the contract multiplier.
Watch out. Mixing up which currency the contract price quotes. USD/CNH futures are quoted as CNH per USD, so a falling price means USD weakening against CNH, not CNH weakening.
Self-check: why might a user choose exchange-traded USD/CNH futures over an OTC forward?
Answer: For standardised contract terms, daily mark-to-market through the clearing house's margin system, and reduced counterparty credit risk.
54. Hedging with currency derivatives
Currency hedging matches a future foreign-currency receipt or payment with an offsetting derivative position. A company expecting to receive foreign currency hedges by selling it forward (or buying puts); one expecting to pay foreign currency buys it forward (or buys calls).
Example. Assume an importer must pay USD 2,000,000 in 3 months and locks a forward at 7.80. Cost is fixed at 2,000,000 x 7.80 = HKD 15,600,000. If spot rises to 8.00, the unhedged cost would be HKD 16,000,000, so the hedge saves HKD 400,000.
Watch out. Hedging in the wrong direction. Receiving USD means selling USD forward; buying USD forward when you will receive USD doubles the exposure instead of offsetting it.
Self-check: in the example, what happens if spot instead falls to 7.60 at settlement?
Answer: The hedge still settles at 7.80, costing HKD 15,600,000, while spot would have cost HKD 15,200,000; the HKD 400,000 is the opportunity cost of certainty, not a loss on the hedge itself.
55. Trading strategies for currency derivatives
Traders take directional views on exchange rates using forwards, futures or options, and can also express volatility views with options. Leverage means small rate moves produce large percentage gains or losses relative to margin posted.
Example. Assume a trader is bearish USD/CNH and sells one futures contract at 7.2500, later buying back at 7.2000. With an assumed multiplier of USD 100,000, profit is 100,000 x (7.2500 - 7.2000) = CNH 5,000.
Watch out. Ignoring that a wrong directional view loses money symmetrically. A short futures position loses if the quoted rate rises; unlike an option buyer, a futures trader has no premium limiting the downside.
Self-check: in the example, if the trader had instead bought at 7.2500 and the price fell to 7.2000, what is the result?
Answer: A loss of 100,000 x 0.0500 = CNH 5,000, the mirror image of the short position's gain.
56. Commodity groups and types of commodity derivatives
Commodities are commonly grouped into energy (e.g. crude oil), metals (precious and base), agricultural products and, in some classifications, livestock and softs. Commodity derivatives on these underlyings include futures, forwards, options and swaps, traded both on exchanges and OTC.
Example. Assume an airline uses crude oil futures to hedge jet-fuel-related exposure, a gold miner sells gold futures, and a grain trader buys wheat futures. Each uses the same instrument type, a futures contract, on a different commodity group.
Watch out. Treating commodities like financial underlyings for holding purposes. Commodities involve storage, transport, quality grades and perishability, which affect pricing and delivery in ways financial assets do not.
Self-check: which commodity group would crude oil, natural gas and heating oil belong to?
Answer: Energy. Precious and base metals, and agricultural products, are the other main groups.
57. Exchange-traded commodity derivative products in Hong Kong
HKFE lists commodity futures contracts, with gold futures being a representative example of exchange-traded commodity derivatives available in Hong Kong. These contracts offer standardised size, delivery terms and clearing-house margining, in contrast to OTC commodity forwards negotiated directly between parties.
Example. Assume a Hong Kong jewellery manufacturer hedges gold purchase costs by buying one gold futures contract. If gold rises from an assumed 2,000 to 2,100 per unit and the contract covers 100 units, the long gains (2,100 - 2,000) x 100 = 10,000, offsetting higher physical purchase costs.
Watch out. Assuming all commodity derivatives must be traded overseas. The syllabus specifically covers exchange-traded commodity products in Hong Kong, so candidates should know local listed contracts exist alongside international exchanges.
Self-check: what protection does clearing an exchange-traded commodity futures contract provide that an OTC forward does not?
Answer: The clearing house interposes as central counterparty, with daily margining, so the trader does not bear the full default risk of the original counterparty.
58. Pricing, hedging and trading strategies for commodity derivatives
Commodity futures prices reflect spot price plus the cost of carrying the physical commodity (financing, storage, insurance), adjusted for any convenience yield from holding the physical good. Hedgers offset physical price exposure; traders use the same contracts for directional or spread positions.
Example. Assume spot gold is 2,000, financing cost 2% for 6 months, storage 10 per unit, and no convenience yield. A 6-month futures price is approximately 2,000 x 1.01 + 10 = 2,030 per unit. A producer selling at 2,030 locks in that price.
Watch out. Applying equity-style cost-of-carry blindly. Storage costs push the futures price up, while a convenience yield pushes it down; omitting either gives the wrong theoretical price.
Self-check: in the example, if a large convenience yield applied, would the theoretical futures price be above or below 2,030?
Answer: Below 2,030, because the benefit of holding the physical commodity reduces the net cost of carrying, lowering the fair futures price.
Topic 6: Derivatives: Trading, Clearing and Settlement
The operational backbone of the market: risks and benefits of derivatives, market analysis, client dealing requirements, HKFE trading practices, value-at-risk, margining, the role of HKCC, and Hong Kong's OTC reporting and CCP clearing regime.
59. Risks of trading derivative products
Derivatives carry leverage risk: a small upfront outlay controls a large notional position, so losses can be large relative to capital and can exceed the amount invested. Other key risks include market risk (adverse price moves), liquidity risk (difficulty closing positions), counterparty risk (especially OTC), and margin risk (forced closure if calls are not met).
Example. Assume a trader pays HK$50,000 margin for an index futures position with notional value HK$1,000,000. A 5% adverse index move loses HK$50,000 (1,000,000 x 5%) — the entire margin, from only a 5% move in the underlying.
Watch out. Assuming losses are limited to the premium paid. That is true for option buyers, but not for futures sellers, option writers, or leveraged OTC positions, where losses can exceed initial outlay.
Self-check: Why can a futures position lose more than the margin initially deposited?
Answer: Leverage: the margin is only a fraction of notional exposure, so losses are calculated on the full notional value.
60. Benefits of trading derivative products
Derivatives offer leverage (large exposure from small capital), efficient hedging of existing risks, lower transaction costs than trading the underlying, and generally good liquidity in exchange-traded products. They also allow investors to take positions on falling markets or to switch asset exposure cheaply without selling the underlying holdings.
Example. Assume a fund holds a HK$10,000,000 stock portfolio and fears short-term weakness. Selling index futures lets it hedge the exposure without selling shares, avoiding transaction costs, stamp-duty-type frictions and disturbing a long-term holding strategy.
Watch out. Treating leverage as an unqualified benefit. It magnifies gains and losses equally, so the same feature that makes derivatives capital-efficient also makes them dangerous for unhedged speculative positions.
Self-check: Give two benefits of using exchange-traded derivatives rather than trading the underlying assets.
Answer: Leverage with lower capital outlay, and efficient, low-cost hedging or exposure switching.
61. Market analysis for derivatives trading
Traders use two broad types of analysis. Fundamental analysis examines economic data, supply and demand, interest rates and company or industry conditions to judge fair value and direction. Technical analysis studies past price and volume patterns, trends and indicators to forecast future price movements, on the premise that history tends to repeat in price behaviour.
Example. Assume a trader expects US rate rises to pressure gold. Fundamentally she notes rising real yields; technically she sees gold break below its 50-day moving average on rising volume. Both analyses point to a short gold futures position.
Watch out. Confusing the two: studying charts and moving averages is technical analysis, not fundamental analysis, even if used alongside economic views.
Self-check: A trader analyses interest-rate forecasts and crop supply reports to trade grain futures. Which type of analysis is this?
Answer: Fundamental analysis — it examines underlying economic and supply-demand factors.
62. Value-at-risk
Value-at-risk (VaR) estimates the maximum loss expected over a given time horizon at a stated confidence level, under normal market conditions. It is expressed as three elements: a money amount, a time period and a confidence level. VaR is widely used to set position limits and report risk, but it says nothing about the size of losses beyond the confidence level.
Example. Assume normally distributed one-day portfolio returns, zero expected daily return, a HK$10,000,000 portfolio and daily volatility of 2%. The model gives 95% one-day VaR = 10,000,000 x 2% x 1.645 = HK$329,000. This estimates a 5% probability of a larger loss under those assumptions; it does not guarantee exactly five breaches in every 100 days.
Watch out. Mixing up confidence levels and multipliers, or forgetting the time horizon. A 99% VaR uses a larger multiplier (about 2.33) and is a bigger number than a 95% VaR on the same portfolio.
Self-check: Using the assumptions above, what is the 95% one-day VaR of a HK$10,000,000 portfolio with 2% daily standard deviation?
Answer: HK$329,000 (10,000,000 x 2% x 1.645).
63. Trading practices on HKFE
HKFE trading is conducted electronically through HKEX's trading system, with orders entered by Exchange Participants on behalf of clients. Key practices include accurate order handling and time priority, trading only within authorised capacities, and maintaining proper records. Participants must ensure orders are genuine and executed according to the Exchange's rules.
Example. Assume a client phones an Exchange Participant to buy one Hang Seng Index futures contract at the market price. The participant enters the order into the electronic system, where it is matched by price and time priority against resting sell orders.
Watch out. Describing HKFE as an open-outcry trading floor. Trading moved to electronic systems long ago; exam answers should reflect electronic order matching through Exchange Participants.
Self-check: Who may enter orders directly into the HKFE trading system on behalf of clients?
Answer: Exchange Participants of HKFE, acting through the electronic trading system.
64. Dealing with clients: requirements and procedures
Before trading for a client, a participant should know the client (including identity and financial situation), execute a client agreement, and provide risk disclosure statements appropriate to derivatives trading. For margin trading, the client must understand margin obligations and the consequences of failing to meet margin calls. Ongoing duties include prompt confirmation of trades and handling of client instructions and collateral.
Example. Assume a new client opens a futures margin account. The participant verifies identity, assesses suitability, signs a client agreement, gives risk disclosure documents explaining leverage and margin calls, and only then accepts the client's first order.
Watch out. Skipping the risk disclosure statement or treating it as optional paperwork. Ensuring clients understand derivative risks before dealing is a core requirement, not a formality.
Self-check: What must be in place before a participant accepts a client's first derivatives order?
Answer: Client identification and assessment, a signed client agreement, and provision of risk disclosure statements.
65. HKEX margining systems and margining methods
The clearing house protects itself from counterparty default through a margining system. Initial margin is collected when a position is opened, sized to cover potential one-day adverse moves. Positions are marked to market daily and losses are collected as variation margin, so losses do not accumulate. Margin levels are reviewed and adjusted as market volatility changes.
Example. Assume initial margin is HK$100,000 per contract (hypothetical). A trader holding one long contract loses HK$40,000 on a daily mark-to-market. The HK$40,000 variation loss is debited from her account, reducing available funds to HK$60,000.
Watch out. Confusing initial margin with variation margin. Initial margin is a performance bond held when opening a position; variation margin is the daily settlement of actual gains and losses.
Self-check: A trader's position loses HK$40,000 at daily mark-to-market. What type of margin covers this?
Answer: Variation margin — the daily settlement of realised mark-to-market losses and gains.
66. HKFE Clearing Corporation Limited (HKCC)
HKCC is the clearing house for HKFE products. It acts as central counterparty: once a trade is registered, HKCC becomes the buyer to every seller and the seller to every buyer through novation. This removes individual counterparty risk between participants, and HKCC manages its exposure by collecting margins, maintaining a default fund/guarantee arrangements, and controlling participant positions.
Example. Assume Participant A buys from Participant B. After registration at HKCC, A's counterparty is HKCC, not B, and B's counterparty is HKCC, not A. If B defaults the next day, A's position is unaffected because HKCC stands in between.
Watch out. Saying HKCC merely records trades. Its defining role is becoming the central counterparty to every cleared trade and guaranteeing performance through the margin system.
Self-check: What does HKCC become once a trade is registered for clearing?
Answer: The central counterparty — buyer to every seller and seller to every buyer.
67. Clearing and settlement of exchange-traded derivatives
After execution, trades are registered with HKCC, margined and marked to market daily until closed out or settled. Settlement depends on the contract: cash-settled contracts (such as index futures) settle by paying the difference between the trade price and the final settlement price, while physically delivered contracts require delivery of the underlying asset against payment at expiry.
Example. Assume a trader buys one cash-settled index futures contract at 20,000 points (hypothetical multiplier HK$50 per point). At expiry the index settles at 20,200. The trader receives (20,200 - 20,000) x 50 = HK$10,000 cash; no shares change hands.
Watch out. Assuming all derivatives settle by physical delivery. Index futures and many other contracts are cash settled — only the price difference is paid, and the position simply expires.
Self-check: Using the assumptions above, what cash settlement does a long futures trader receive if the index settles 200 points above the entry price with a HK$50 multiplier?
Answer: HK$10,000 (200 x 50), paid in cash with no delivery of the underlying.
68. OTC trade execution and confirmation
OTC derivatives are negotiated directly between counterparties, so execution does not happen on an exchange. After a trade is agreed, the parties exchange a confirmation setting out the economic terms — notional, rates, dates and settlement terms — so both sides agree on the contract. Timely confirmation reduces disputes and operational risk, and is a building block for the reporting and clearing steps that follow.
Example. Assume a bank and a corporate agree a hypothetical interest-rate swap by phone. The bank sends a confirmation note stating the notional, fixed rate, floating-rate benchmark and payment dates; the corporate checks and confirms, locking in identical terms on both sides.
Watch out. Assuming OTC trades need no documentation because they are private. Without an agreed confirmation, the parties may hold different views of the same trade, creating settlement disputes.
Self-check: What is the purpose of a trade confirmation in an OTC derivatives transaction?
Answer: To record and agree the economic terms of the trade between both counterparties.
69. Mandatory OTC reporting, trade repositories and the HKTR
Hong Kong's OTC derivatives regime requires specified OTC derivative transactions to be reported to a trade repository, the Hong Kong Trade Repository (HKTR), operated by HKEX. Reporting gives regulators visibility of the OTC market, which was largely opaque before the reforms. Specified categories — currently interest rate swaps and non-deliverable forwards — must be reported, with responsibility and timing depending on the type of entity and transaction.
Example. Assume a bank enters a USD interest rate swap with a corporate client. Under the regime the transaction details — counterparties, notional, rates and dates — are reported to the HKTR, creating a regulatory record of the trade.
Watch out. Thinking all OTC derivatives must be reported. The regime applies to specified categories of OTC derivatives, not to every conceivable OTC contract.
Self-check: What is the HKTR and what is its core function under the OTC derivatives regime?
Answer: Hong Kong's trade repository, operated by HKEX, which collects mandatory reports of specified OTC derivative transactions.
70. Central counterparty clearing for OTC derivatives
Under Hong Kong's regime, specified OTC derivatives — currently certain interest rate swaps and non-deliverable forwards — are subject to mandatory central counterparty clearing. A CCP interposes itself between the two counterparties by novation, collects margin from both sides, and manages defaults through its default resources. This reduces bilateral counterparty risk and network contagion, though it concentrates risk in the CCP itself.
Example. Assume two banks clear their interest rate swap through a CCP. The original contract is replaced by two contracts — each bank against the CCP — and both banks post margin to the CCP, so neither bears the other's default risk directly.
Watch out. Confusing mandatory reporting with mandatory clearing. Reporting sends trade data to the HKTR; clearing replaces bilateral counterparty exposure with the CCP as central counterparty — two different obligations.
Self-check: How does a CCP reduce counterparty risk between two OTC counterparties?
Answer: By novation: it becomes buyer to one and seller to the other, and manages defaults through collected margin and default resources.
Turn your revision into a study plan
Adjust the pace to your starting knowledge and examination date. These are suggested revision stages, not an official preparation timetable.
| Stage | What to do |
|---|---|
| Stage 1 - Orient yourself | Compare the public syllabus with the official guide valid for your sitting. Mark each concept as familiar, uncertain or new, then plan your revision around the areas that need work. |
| Stage 2 - First full pass | Work through the six topics in syllabus order, one concept at a time. Read the corresponding study guide section, make your own short notes, and tick each concept only when you can explain it in your own words. Expect equity derivatives (Topic 3) to take the most sessions. |
| Stage 3 - Practise and calculate | Go back to every concept that involves numbers or strategies: pay-off diagrams, option pricing and the Greeks, index and HIBOR futures pricing and value, and the hedging examples across Topics 3 to 5. Work practice questions under timed conditions and keep an error log by concept. |
| Stage 4 - Final consolidation | In the last stretch before exam day, re-take practice questions, drill your error log, and re-read the unticked or shaky concepts. Finish with a timed 40-question mock at exam pace (40 questions in 60 minutes) so the format, including the 70% pass mark, holds no surprises. |
Questions candidates ask
What is the format of the HKSI Paper 9 exam?
Paper 9 is a closed-book multiple-choice exam of 40 questions to be completed in 60 minutes, with a pass mark of 70% (so you need 28 correct answers). Confirm the current details in the official exam overview before you sit, as it is always worth checking for updates.
Which version of the syllabus and study guide should I study from?
Use official study guide version 3.6 for examinations from 6 July 2026, and check HKSI's update page for your sitting. The public syllabus currently linked for Paper 9 is labelled 3.5; it is a different document from the full study guide.
Do I need to be able to do calculations for Paper 9?
Yes. The syllabus outcomes ask you to calculate prices and values for equity derivatives (including index futures), interest-rate derivatives such as HIBOR futures, and currency and commodity derivatives, and to apply option pricing models and pay-off diagrams. Build calculation practice into Stage 3 of your plan rather than relying on memorising formulas alone.
How much time should each topic get?
The official syllabus does not publish weightings, so avoid anyone who quotes fixed question counts per topic. A sensible approach is to let breadth guide you: Topic 3 (equity derivatives) covers many more named products than any other topic and will likely need the most sessions, while Topics 1 and 4 are shorter and can move faster.
Can I pass using this outline alone?
This guide is a revision outline, not a study text. Each of the 70 concepts needs to be learned from the official study guide and then tested with practice questions. Used properly - as a checklist, planner and progress tracker - it keeps your preparation complete and organised, and pairs with the official materials rather than replacing them.
Official sources and further reading
- HKSI Paper 9 syllabus and learning outcomes (PDF)
- HKSI current study guide versions and effective dates
- HKSI examination format and study resources
- HKEX Stock Futures: current contract summary
- HKMA Quarterly Bulletin: Bond and Swap Connect developments,2026
These independent revision notes explain the public syllabus through original examples. They do not reproduce the official study guide or examination questions. Use the official study guide valid for your examination date for the full examinable detail. HKSIDataBase is an independent provider and is not endorsed by the HKSI Institute.