MSCI China Free Index Futures

1
MSCI China Free Index Futures
2
Trading of MSCI China Free Index Futures will
commence on 7 May 2001
3
Content

• Growing Importance of Chinese Economy
• MSCI? China Free IndexSM - Description
• Characteristics of MSCI China Free Index
• Reasons for Launching MSCI China Free Index
  Futures
• Advantages of Trading MSCI China Free Index
  Futures
• Trading Strategies for MSCI China Free Index
  Futures
• Features of MSCI China Free Index Futures
  Contract
• Risks of Trading Index Futures
• How to Start Trading Futures
• Q and A
• Appendix

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Growing Importance of Chinese Economy(1)

• Remarkable growth of Chinese economy
• For Q1-Q3 2000, China registered GDP growth of
  8(y.o.y).
• Can benefit by investing in freely investable
  China equities listed in Hong Kong, the Mainland
  B-share and New York N-share markets.

5
Growing Importance of Chinese Economy(2)

• Increasing foreign interest in China equity
  market
• due to rapid financial market reforms in China
  and Chinas expected entry to the WTO.

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MSCI China Free Index - Description(1)

• Represents the universe of opportunities for
  investment in Chinese stocks available to
  non-domestic investors.
• Consists of 30 constituent stocks with a market
  capitalisation of HK479.95 billion(19/03/2001).
• A market capitalisation-weighted index.

Source MSCI
7
MSCI China Free Index - Description(2)

• Can include Red Chips and H Shares listed in
  H.K., B Shares listed in Shanghai and Shenzhen,
  and N Shares listed in New York.

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Top 5 Constituents of MSCI China Free Index(as
of 19 Mar 2001)
Please see Appendix for the full list of
constituents and their weightings
Source MSCI
9
Composition of MSCI China Free Index (as of 19
Mar 2001)
Types No. of Stocks Red Chips 14 H
Shares 14 Shanghai B Shares
1 Shenzhen B Shares 1
Total 30
Source MSCI
10
Market Capitalisation Composition of MSCI China
Free Index (as of 19 Mar 2001)
Source MSCI
11
Performance of MSCI China Free Index
Source MSCI
12
Characteristics of MSCI China Free Index(1)

• Market Awareness
• MSCI is a leading provider of global indices and
  benchmark related products and services to
  investors.
• Many investment funds use MSCI indices as their
  performance benchmarks.
• A benchmark for the performance of equity
  investment in China.

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Characteristics of MSCI China Free Index(2)

• Flexibility
• New issues may be immediately reflected with
  MSCIs flexible inclusion policy.

• Market Participation
• Investors will use futures contracts on MSCI
  China Free Index to manage their exposures in
  China equities.

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Reasons for Launching MSCI China Free Index
Futures(1)

• Market Needs
• Hong Kong acts as a capital formation centre for
  Mainland China through Red Chips and H Shares.
• MSCI China Free Index futures supports and
  enhances the Red-chip stocks and H-share market.

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Reasons for Launching MSCI China Free Index
Futures(2)

• Opportunity
• Chinese companies are a major focus of global
  investors as China prepares to join WTO.
• International Appeal
• MSCI is a leading global brand name, and the
  Index is monitored daily by many fund managers
  who invest in Asia.

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Advantages of Trading MSCI China Free Index
Futures(1)

• Efficient Execution
• Investors can establish market positions with
  stock index futures linked to the performance of
  Chinese stocks open to investors outside Mainland
  China.

• Cost Effectiveness
• Trading and hedging activities (on a margin
  basis) can be done in a cost-effective manner.

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Advantages of Trading MSCI China Free Index
Futures(2)

• Price Protection of Stock Portfolio
• Enables hedging /protection of stock portfolio
  from falling prices.
• Risk Diversification
• Allows diversification of risk spread over 30
  constituent stocks.

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Advantages of Trading MSCI China Free Index
Futures(3)

• Low Transaction Costs
• Transaction costs much lower than that of buying
  or selling the underlying stocks.
• Double Trading Opportunity
• Allows a bullish or bearish position by buying or
  selling futures first.

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Advantages of Trading MSCI China Free Index
Futures(4)

• Clearing House Guarantee
• Contracts registered, cleared and guaranteed by
  HKFE Clearing Corporation, a wholly-owned member
  of the HKEx Group, eliminating counter-party
  risks.

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Advantages of Trading MSCI China Free Index
Futures(5)

• Efficient Trading System - HKATS
• Order matched on price and time priority
• Firm bid/offer prices with quantity of contracts
  at each price
• Instant dissemination of prices

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Trading Strategies for MSCI China Free Index
Futures
Bullish

• Directional Trading
• Hedging

Bearish
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Directional Trading (1)
HK000
Long contract at 2,200
30
Profit
2,300 - 2,200100
20
10
0
- 10
Loss
- 20
- 30
1,900
2,000
2,100
2,200
2,300
2,400
2,500
Futures Prices
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Directional Trading (2)
HK000
Short contract at 2,200
30
20
Profit
1002,200-2,100
10
0
- 10
Loss
- 20
- 30
1,900
2,000
2,100
2,200
2,300
2,400
2,500
Futures Prices
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Hedging

• Short Hedge
• Sells futures to avoid losses from possible price
  declines on underlying asset held.
• Long Hedge
• Purchases futures to protect buyer against price
  rises on underlying asset.

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Short Hedge(1)

• In early January, an investor is holding a
  portfolio (worth HK220,000) similar to that of
  MSCI China Free Index.
• Anticipates a short-term decline in the stock
  market.
• Hedges his position by selling one futures
  contract at 2,200 points.

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Short Hedge(2)

• At end-January, if the market drops by 5 to
  2,090 points as anticipated, then portfolio value
  falls to HK209,000.
• Gains HK11,000 (110 x HK100) from his futures
  position.
• Gain in futures position offsets loss in
  portfolio value. Overall portfolio value remains
  at around HK220,000.

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Short Hedge(3)

• At end-January, if the market rises by 5 to
  2,310 points, then portfolio value increases to
  HK231,000.
• Loses HK11,000 (110 x HK100) from his futures
  position.
• Increase in portfolio value offsets loss in
  futures position . Overall portfolio value
  remains at around HK220,000.

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Long Hedge(1)

• Suppose the Index is at 2,200 points in early
  January. An investor wants to invest HK220,000
  in a portfolio similar to that of MSCI China Free
  Index , but money available only at end-January.
• Expects the market to rise.
• Longs one futures contract to lock in the current
  purchase price.

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Long Hedge(2)

• At end-January, if the market rises by 5 to
  2,310 points, the value of shares for purchase
  increases to HK231,000.
• Long futures position brings a profit of
  HK11,000 (110 x HK100).
• Gain in futures position offsets appreciation in
  share value.

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Long Hedge(3)

• At end-January, if the market declines by 5 to
  2,090 points, the value of shares for purchase
  decreases to HK209,000.
• Long futures position incurs a loss of HK11,000
  (110 x HK100).
• Depreciation in share value offsets loss in
  futures position .

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Features of MSCI China Free Index Futures
Contract (1)
Contract Multiplier
HK100 per index point
Min. Fluctuation
0.1 index point
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Features of MSCI China Free Index Futures
Contract (2)
Contracted Value
Contracted Price x Contract Multiplier
Contract Months
Spot month, the next calendar month, and the next
two calendar quarter months
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Features of MSCI China Free Index Futures
Contract (3)
Trading Hours (H.K. Time)
945a.m. - 1230p.m. 230p.m. - 415p.m.
Trading Hours on Last Trading Day (H.K. Time)
945a.m. - 1230p.m. 230p.m. - 400p.m.
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Features of MSCI China Free Index Futures
Contract (4)
Trading Method
The Exchanges Automated Trading System(HKATS)
Last Trading Day
The Business Day immediately preceding the last
Business Day of the Contract Month
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Features of MSCI China Free Index Futures
Contract (5)
Final Settlement Day
The first Business Day after the Last Trading Day
Settlement Method
Cash (H.K. Dollar) settled contract for
differences
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Features of MSCI China Free Index Futures
Contract (6)
Final Settlement Price
The average of the quotations of the MSCI China
Free Index taken at 5-minute interval during the
Last Trading Day
Commission Rate
Negotiable
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Features of MSCI China Free Index Futures
Contract (7)
Trading Fees and Levies (per contract per side)
HK Exchange Fee 10.00 SFC Levy
1.00 Compensation Fund Levy 0.50
Total 11.50
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Risks of Trading Index Futures

• Financial Leverage
• Margin Requirement
• Substantial Losses

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Financial Leverage
Return ()
Long position on MSCI China Free Index futures
90.9
45.5
0
- 45.5
9.09
Futures Price
- 90.9
2,000
2,100
2,200
2,300
2,400
- 9.09
Assuming clients margin HK22,000
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Initial Margin
Margin Requirement
When balance in margin account falls below
maintenance margin, requires to deposit extra
fund to top up margin account to initial margin.
Maintenance Margin
If the investor does not provide the extra fund
within a stated period of time, the broker will
close out the position. The investor is
responsible for all the losses.
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Risk of Incurring Substantial Loss

• Actual investment may be greater than the margin
  required. Thus losses can be larger than the
  margin paid.
• Holding a long position, the maximum loss is the
  contracted value for futures.
• Holding a short position, the loss may be
  substantial.

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How to Start Trading Futures

• Select your brokerage firm from qualified
  Exchange Participants.
• Consult Exchange Participants on nature and risks
  of trading futures .
• Read and sign the Risk Disclosure Document and
  deposit the required collateral or cash.
• Familiarise with trading procedures and be
  prepared for margin calls during volatile market
  conditions. Keep close contact with your broker.

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Q and A
44
Appendix - Constituent Stocks of MSCI China Free
Index as of 19/03/01 (1)
Source MSCI
45
Appendix - Constituent Stocks of MSCI China Free
Index as of 19/03/01 (2)
Source MSCI
46
Appendix - Constituent Stocks of MSCI China Free
Index as of 19/03/01 (3)
Source MSCI
47
Appendix - Constituent Stocks of MSCI China Free
Index as of 19/03/01 (4)
Source MSCI