Jimmy is a successful fund manager. He has been managing the Hong Kong equities fund for over
Question:
Jimmy is a successful fund manager. He has been managing the Hong Kong equities fund for over five years with current assets under management (AUM) of HKD250 million and compound annual growth rate (CAGR) of 20%. The recent sluggish economic performance in Europe and mainland China causes Jimmy to believe that the stock market will go further down in the coming months. Worrying the value of his investment portfolio will be adversely affected by his forecasted market downturn, Jimmy intends to use Hang Seng Index futures (HSI futures) to hedge the risk exposure. Assuming today is 1 December 20x2, further market information is revealed below:
Current Hang Seng Index (1 December 20x2) 19,550
Current Hang Seng Index futures (March 20x3 contract) 19,200
Contract multiplier HKD50 per index point
Margin requirement HKD50,550 per HSI futures contract
a Evaluate with one reason whether Jimmy should long or short Hang Seng Index futures contracts. (4 marks)
b Calculate the number of Hang Seng Index futures contracts and the amount of margin deposit required to hedge against the risk exposed to Jimmy's portfolio. (7 marks)
c Discuss whether it is possible for investment managers to realise a perfect hedge. (8 marks)
d What are the advantages of using exchange-traded derivatives such as HSI futures contracts to hedge the risk exposure? What are the advantages of using over-the-counter (OTC) derivatives?