RedRock, a Hong Kong based hedge fund manager specialising in technology investment, is holding an aggregate portfolio of HK and US stocks. The manager expects the stock market as a whole to have a correction over the following two to three weeks. Details of the portfolio are given as of 28 February 2022. USD/HKD exchange rate is quoted at 7.8000.

e) Calculate the profit/loss of HK portfolio, US portfolio and the futures positions taken, respectively. (4 marks)

f) Calculate the overall profit/loss and comment the effectiveness of the hedging strategy. (4 marks)

After the market correction, the fund manager foresees the benefit of massive capital inflows from mainland China to Hong Kong. He decides to increase the beta of HK portfolio to 1.15 and re-allocate 80% of the US fund to the HK stock market until August 2022.

g) Advice the fund manage how this position can be achieved using the futures contracts as of 13 April 2022. (10 marks)

h) If retaining this position for 12 months, what alternative trading strategies should be taken? (7 marks

RedRock, a Hong Kong based hedge fund manager specialising in technology investment, is holding an aggregate portfolio of HK and US stocks. The manager expects the stock market as a whole to have a correction over the following two to three weeks. Details of the portfolio are given as of 28 February 2022. USD/HKD exchange rate is quoted at 7.8000. Stock Code Stock Name Currency Price Market Cap. (B) No. of Shares Beta 0005 0388 0700 1810 2269 2318 2382 3690 9618 9988 HSBC HKEX Tencent Xiaomi WuXi Biologics Ping An Insurance Sunny Optical Meituan JD.com Alibaba HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD 54.10 377.60 421.20 14.66 109,40 60.40 186.70 172.20 279.20 104.20 1,096.00 478.74 4,046,00 366.03 64.25 1,133.00 204.78 1.056.00 871.07 2,240.00 300,000 0.58 30,000 0.90 30,000 0.49 800,000 1.40 600,000 1.08 500,000 0.93 100.000 1.01 50,000 1.00 50,000 0.69 100,000 0.83 AAPL AMZN FB GOOG IBM INTC MSFT MRNA TSLA TWTR Apple Amazon Meta Platforms Alphabet IBM Intel Microsoft Moderna Tesla Twitter USD USD USD USD USD USD USD USD USD USI 165.12 3,071.26 211.03 2.697.82 122.51 47.70 298.79 153.60 870.43 35.55 2,659.00 1,563.00 574.41 1,783.00 194.23 220.94 2.240.00 62.28 899.60 28.46 20,000 1.19 1.000 1.13 10,000 1.29 1,500 1.03 23,000 1.09 49,000 0.54 13,000 0.89 10,000 1.48 4.000 2.01 50,000 0.75 The following prices obtained from the futures markets as of 28 February 2022. The contract specifications and other relevant information can be found in the Hong Kong Exchange and Clearing website, www.hkex.com.hk, and the CME Group website, www.cmegroup.com. Futures Contract Spot Mar-2022 Apr-2022 Jun-2022 Sep-2022 Hang Seng Index 22,713 22,657 22,648 22,383 22,162 Hang Seng TECH Index 5,113 5,126 5,128 5,133 5,136 Hang Seng China Enterprises Index 8,024 8,031 8,036 7,941 7,856 E-Mini S&P 500 E-Mini Nasdaq-100 E-Mini Dow Jones Industrial 4,373.75 14,237.81 33.892.60 4,370 14,218.00 33,843.00 4,362 14,210.00 33,744.00 4,360 14,200.00 33,435.00 Suppose the fund manager implemented your recommendation and would like to close out the futures positions on 13 April 2022 using the following market prices. USD/HKD exchange rate remains unchanged. Stock Code Stock Name Currency Price No. of Shares Beta 0005 0388 0700 1810 2269 2318 2382 3690 9618 9988 HSBC HKEX Tencent Xiaomi Wuxi Biologics Ping An Insurance Sunny Optical Meituan JD.com Alibaba HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD 53.00 361.00 402.00 12.00 98.00 59.00 179.00 158.00 263.00 97.00 300,000 0.58 30,000 0.90 30,000 0.49 800,000 1.40 600,000 1.08 500,000 0.93 100,000 1.01 50,000 1.00 50,000 0.69 100,000 0.83 AAPL AMZN FB GOOG IBM INTC MSFT MRNA TSLA TWTR Apple Amazon Meta Platforms Alphabet IBM Intel Microsoft Moderna Tesla Twitter USD USD USD USD USD USD USD USD USD USD 169.00 3,140.00 216.00 2,756.00 123.00 48.00 303.00 159.00 906.00 36.00 20,000 1.19 1,000 1.13 10,000 1.29 1,500 1.03 23.000 1.09 49,000 0.54 13,000 0.89 10,000 1.48 4,000 2.01 50,000 0.75 Spot Apr-2022 Jun-2022 Sep-2022 Futures Contract Hang Seng Index Hang Seng TECH Index Hang Seng China Enterprises Index 21.134 4,737 7,498 21,074 4,751 7,510 20,827 4,756 7,421 20,622 4,759 7,341 E-Mini S&P 500 E-Mini Nasdaq-100 E-Mini Dow Jones Industrial 4,476.53 14,515.45 34,621.29 4,465 14,487 34,469 4,462 14,477 34,154 e) Calculate the profit/loss of HK portfolio, US portfolio and the futures positions taken, respectively. (4 marks) f) Calculate the overall profit/loss and comment the effectiveness of the hedging strategy. (4 marks) After the market correction, the fund manager foresees the benefit of massive capital inflows from mainland China to Hong Kong. He decides to increase the beta of HK portfolio to 1.15 and re-allocate 80% of the US fund to the HK stock market until August 2022. g) Advice the fund manage how this position can be achieved using the futures contracts as of 13 April 2022. (10 marks) h) If retaining this position for 12 months, what alternative trading strategies should be taken? (7 marks) RedRock, a Hong Kong based hedge fund manager specialising in technology investment, is holding an aggregate portfolio of HK and US stocks. The manager expects the stock market as a whole to have a correction over the following two to three weeks. Details of the portfolio are given as of 28 February 2022. USD/HKD exchange rate is quoted at 7.8000. Stock Code Stock Name Currency Price Market Cap. (B) No. of Shares Beta 0005 0388 0700 1810 2269 2318 2382 3690 9618 9988 HSBC HKEX Tencent Xiaomi WuXi Biologics Ping An Insurance Sunny Optical Meituan JD.com Alibaba HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD 54.10 377.60 421.20 14.66 109,40 60.40 186.70 172.20 279.20 104.20 1,096.00 478.74 4,046,00 366.03 64.25 1,133.00 204.78 1.056.00 871.07 2,240.00 300,000 0.58 30,000 0.90 30,000 0.49 800,000 1.40 600,000 1.08 500,000 0.93 100.000 1.01 50,000 1.00 50,000 0.69 100,000 0.83 AAPL AMZN FB GOOG IBM INTC MSFT MRNA TSLA TWTR Apple Amazon Meta Platforms Alphabet IBM Intel Microsoft Moderna Tesla Twitter USD USD USD USD USD USD USD USD USD USI 165.12 3,071.26 211.03 2.697.82 122.51 47.70 298.79 153.60 870.43 35.55 2,659.00 1,563.00 574.41 1,783.00 194.23 220.94 2.240.00 62.28 899.60 28.46 20,000 1.19 1.000 1.13 10,000 1.29 1,500 1.03 23,000 1.09 49,000 0.54 13,000 0.89 10,000 1.48 4.000 2.01 50,000 0.75 The following prices obtained from the futures markets as of 28 February 2022. The contract specifications and other relevant information can be found in the Hong Kong Exchange and Clearing website, www.hkex.com.hk, and the CME Group website, www.cmegroup.com. Futures Contract Spot Mar-2022 Apr-2022 Jun-2022 Sep-2022 Hang Seng Index 22,713 22,657 22,648 22,383 22,162 Hang Seng TECH Index 5,113 5,126 5,128 5,133 5,136 Hang Seng China Enterprises Index 8,024 8,031 8,036 7,941 7,856 E-Mini S&P 500 E-Mini Nasdaq-100 E-Mini Dow Jones Industrial 4,373.75 14,237.81 33.892.60 4,370 14,218.00 33,843.00 4,362 14,210.00 33,744.00 4,360 14,200.00 33,435.00 Suppose the fund manager implemented your recommendation and would like to close out the futures positions on 13 April 2022 using the following market prices. USD/HKD exchange rate remains unchanged. Stock Code Stock Name Currency Price No. of Shares Beta 0005 0388 0700 1810 2269 2318 2382 3690 9618 9988 HSBC HKEX Tencent Xiaomi Wuxi Biologics Ping An Insurance Sunny Optical Meituan JD.com Alibaba HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD 53.00 361.00 402.00 12.00 98.00 59.00 179.00 158.00 263.00 97.00 300,000 0.58 30,000 0.90 30,000 0.49 800,000 1.40 600,000 1.08 500,000 0.93 100,000 1.01 50,000 1.00 50,000 0.69 100,000 0.83 AAPL AMZN FB GOOG IBM INTC MSFT MRNA TSLA TWTR Apple Amazon Meta Platforms Alphabet IBM Intel Microsoft Moderna Tesla Twitter USD USD USD USD USD USD USD USD USD USD 169.00 3,140.00 216.00 2,756.00 123.00 48.00 303.00 159.00 906.00 36.00 20,000 1.19 1,000 1.13 10,000 1.29 1,500 1.03 23.000 1.09 49,000 0.54 13,000 0.89 10,000 1.48 4,000 2.01 50,000 0.75 Spot Apr-2022 Jun-2022 Sep-2022 Futures Contract Hang Seng Index Hang Seng TECH Index Hang Seng China Enterprises Index 21.134 4,737 7,498 21,074 4,751 7,510 20,827 4,756 7,421 20,622 4,759 7,341 E-Mini S&P 500 E-Mini Nasdaq-100 E-Mini Dow Jones Industrial 4,476.53 14,515.45 34,621.29 4,465 14,487 34,469 4,462 14,477 34,154 e) Calculate the profit/loss of HK portfolio, US portfolio and the futures positions taken, respectively. (4 marks) f) Calculate the overall profit/loss and comment the effectiveness of the hedging strategy. (4 marks) After the market correction, the fund manager foresees the benefit of massive capital inflows from mainland China to Hong Kong. He decides to increase the beta of HK portfolio to 1.15 and re-allocate 80% of the US fund to the HK stock market until August 2022. g) Advice the fund manage how this position can be achieved using the futures contracts as of 13 April 2022. (10 marks) h) If retaining this position for 12 months, what alternative trading strategies should be taken? (7 marks)