Financial Derivatives 財務衍生工具

Uses of Financial Derivatives 財務衍生工具的用途

A financial derivative takes its value from an underlying asset or reference measure, such as a share, bond, interest rate, foreign currency or stock market index. The same instrument can serve risk management, speculation or arbitrage, depending on the purpose of the trade and the investor's existing position.

Hedging uses opposing price effects to offset risk. A fund manager holding shares may sell stock index futures so that futures gains offset losses when the stock market falls. With a complete hedge, gains on the shares when the market rises are also offset by futures losses, so protection against falls comes with the loss of the corresponding upside.

Speculation means taking a position based on a price forecast, hoping to close it at a more favourable price. Someone with no shareholding who sells HSI futures because they expect the index to fall is speculating: a fall produces a gain and a rise produces a loss. Speculators can also add liquidity to the market.

Arbitrage exploits mispricing through simultaneous purchases and sales of the same or similar assets in different markets to lock in a risk-free profit. The basic direction is to buy the underpriced side and sell the overpriced side; the trades must work together and leave a profit after costs. Merely forecasting a market rise or fall is not arbitrage.

Forward and Futures Contracts 遠期及期貨合約

A forward contract fixes a price now for a transaction in an asset or goods on a specified future date, with both parties obliged to perform. A futures contract standardises this arrangement and trades on a futures exchange. A futures position can be closed through an offsetting trade or settled by physical delivery or cash, according to its terms.

HSI futures trade on Hong Kong Futures Exchange Limited and settle in cash without delivery of the constituent shares. The multiplier is HK$50 per index point for standard HSI futures and HK$10 for Mini-HSI futures; at 26,000 points, their contract values are HK$1,300,000 and HK$260,000 respectively. [HSI futures specifications](https://www.hkex.com.hk/products/listed-derivatives/equity-index/hang-seng-index-%28hsi%29/hang-seng-index-futures?sc_lang=en), [Mini-HSI futures specifications](https://www.hkex.com.hk/products/listed-derivatives/equity-index/hang-seng-index-%28hsi%29/mini-hang-seng-index-futures?sc_lang=en)

For a purchased futures position, profit or loss is the settlement price less the purchase price, multiplied by the contract multiplier and number of contracts; reverse the price subtraction for a short position. Buying one standard HSI futures contract at 25,500 and settling at 26,000 gives a profit before costs of (26,000 − 25,500) × 50 = HK$25,000.

Both futures buyers and sellers initially provide margin while taking price exposure to the whole contract, creating leverage. Margin requirements vary by product, market and market conditions rather than following a universal percentage. Contract value, margin and trading profit or loss are different concepts, and margin does not cap the loss.

Options and Warrants 期權及認股權證

An option buyer pays a premium for the right to transact in the underlying asset at the agreed price and time, and may choose not to exercise. If the buyer exercises, the writer must perform. A call gives the right to buy and a put gives the right to sell. The predetermined transaction price is the strike or exercise price.

A European option can be exercised only on its expiry date; an American option can be exercised on or before expiry. Options may trade over the counter or on an exchange. Standardised exchange contracts and a clearing corporation support trading and settlement; the clearing corporation records trades and acts as counterparty to buyers and writers. Writers must provide margin as required by the contract to support performance.

Warrants work similarly to stock options and include calls and puts. In Hong Kong, an equity warrant is issued by the company whose shares underlie it; a derivative warrant is issued by a third party, usually an investment house or financial institution. The key distinction is the issuer's relationship with the company behind the underlying shares.

Option buyers and writers have different gain and loss profiles. For the option itself, excluding other costs, the buyer's maximum loss is the premium paid. For a stock call, the buyer's gain from a rising share price is theoretically unlimited; a writer without shares to cover the call can earn no more than the premium but may face unlimited loss. This unlimited upside example should not be extended to every type of option purchase.

Advantages of Derivatives 衍生工具的好處

Derivatives can effectively hedge unwanted price risks and provide an efficient way to express a market view. Exchange-traded derivatives offer liquidity, while transaction costs are generally low.

Leverage gives a larger market exposure for a smaller initial outlay, creating the potential for high returns. Buying an option also provides a defined loss limit: excluding other costs, the option itself can lose no more than its premium. This limit does not apply to option writers or futures traders.

Disadvantages of Derivatives 衍生工具的弊處

Derivatives can be highly complex and risky, making them suitable only for sophisticated or professional investors who fully understand their nature and risks. Leverage magnifies adverse price movements. Futures traders and option writers may lose more than their initial outlay, and some positions can produce unlimited losses.

Option buyers must pay the premium upfront, which can require a substantial outlay. A limited loss can still mean losing the entire premium. If an option or warrant expires without realisable value, its purchase cost can be lost completely; paying a premium does not preserve exercise rights beyond expiry.

Holding an option or warrant over securities does not itself make the holder an owner of those securities or entitle them to dividends on the underlying shares. Price exposure and shareholder status are separate matters.