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A futures contract is a legally binding commitment between two parties to buy or sell a specific financial instrument at a given future date at a price set at the time of dealing. One of the main features of futures is the leverage they provide. With relatively little capital, usually just a small percentage of the contract's value, buyers and sellers are able to participate in the price movement of the full contract. As a result, the leverage can lead to substantial returns on the original investment. However, it can also lead to substantial losses. The risks associated with futures can be significant and investors must fully understand the risks before buying or selling futures contracts.

Generally speaking, futures contracts can serve three objectives: pure trading, hedging and arbitrage.

Pure trading is mainly based on unidirectional investment strategies, where an investor buys or sells a specific quantity of futures contracts based on his own projection of the movement of an underlying stock or an index.

The purpose of hedging is to offset the negative impact of market moves on a portfolio’s overall return.

Arbitrage refers to profiting from the difference between the prices of similar financial instruments in the futures and securities markets by buying low in one market and selling high in another.

What is an option?

There are two types of options: a call and a put. A call option gives the holder the right to buy the underlying asset. A put option gives the holder the right to sell the underlying asset. Therefore, an option holder really has an option to exercise either the right to buy or the right to sell.

While holders have no obligations to exercise their rights, writers are obliged to honour the contracts they have sold if the holders choose to exercise theirs however disadvantages this may be to the writers. When writing options, the writers risk incurring a loss or forgoing a profit. In turn, they receive a premium from the buyers. The options buyers’ exposure (before exercising their rights) is limited to the premium paid for the options.

What are Hang Seng Index futures and options? What are their characteristics?

Hang Seng Index futures and option contracts (commonly known as HSI futures and HSI options in Hong Kong), are equity index products and major products of HKEX’s derivatives market in terms of trading volume. The Hong Kong Futures Exchange (HKFE), a wholly-owned subsidiary of HKEX, first introduced HSI futures contracts in May 1986 and then HSI option contracts in March 1993. The underlying asset of HSI futures and options is the Hang Seng Index which is compiled by Hang Seng Indexes Company Limited. The HSI, a market capitalisation-weighted index, is widely used as a benchmark for the performance of Hong Kong-listed stocks. Basically, there are two types of HSI option contracts, the call option and the put option. A call option gives its holder the right, but not the obligation, to buy the HSI at a predetermined price at expiry, whereas a put option gives its holder the right, but not the obligation, to sell the HSI at a predetermined price at expiry.

HSI futures and options have the following characteristics:

The underlying asset is a benchmark for the performance of Hong Kong-listed stocks. Since the HSI is widely used as a benchmark for the performance of Hong Kong-listed stocks, HSI futures and options can be used as a hedging tool by investors to manage their risks from exposure to the Hong Kong stock market. Investors can also buy or sell HSI futures or option contracts for pure directional trading whenever they are bullish or bearish about the market.
Cost effective
HSI Index futures and options facilitate investment in a cost-effective way as these contracts are traded on a margin basis. The margin to carry an open position is only a fraction of the contract’s value.
Low transaction costs
As the total value of high-capitalisation stocks represented in each HSI futures and options contract is substantial and as commission is only charged once for each transaction in futures or options contracts, transaction costs are low compared to purchasing or selling the constituent stocks.
Clearing house guarantee
Same as other futures and options contracts traded on HKFE, HSI futures and options are registered, cleared and guaranteed by the HKFE Clearing Corporation (HKCC), a subsidiary of HKEX. HKCC acts as the counter-party to all open contracts, which effectively eliminates counter-party risks between HKCC Participants. However, the guarantee does not cover an HKCC Participant’s obligations to its clients. Investors should exercise due care and diligence when deciding through whom they will conduct business.

The contract multiplier for HSI futures and options is 50 per index point. The contract months for HSI futures are spot, next calendar and next two calendar quarter months. The contract months for short-dated options contracts are spot, next two calendar and next three calendar quarter months, whereas those for long-dated options are the next five months of June and December.

For more information, investors can refer to "Hang Seng Index Futures & Options" under "Products & Services - Derivatives Products" on the HKEX website.

How are HSI options traded?

HSI options are option contracts traded on HKFE. They give the holder or buyer the right, but not the obligation, to buy or sell the HSI at a predetermined price (strike or exercise price) on a given date (expiry). The writer or seller of the option, on the other hand, is obligated to sell or buy the HSI to/from the option buyer at a predetermined price when the buyer exercises the option.

The option buyer pays the price of the option, which is called the option premium, for the exercise right from the option seller. The option seller provides the right of exercise to the option buyer in return for the option premium.

The HSI option is a European-style option which can only be exercised at expiry. The HSI option contract is standardised at $50 per index point ($10 per index point for Mini-HSI option contracts). The value of each HSI option contract is equal to the option premium multiplied by $50.

What are Mini-Hang Seng Index futures and options? What are their characteristics?

HKEX introduced the Mini-Hang Seng Index (Mini-HSI) futures on 9 October 2000 and the Mini-HSI options on 18 November 2002.

Same as HSI futures and option contracts, the underlying asset of Mini-HSI futures and options is the Hang Seng Index. The contract multiplier for Mini-HSI futures and option contract is HK$10 per index point, or one-fifth of the size of the HSI futures and option contract.

Mini-HSI futures and option contracts are tailored for individuals who have less risk capital, allowing them to participate in the performance of the constituent stocks in the index with a smaller investment. The margin between the standard HSI and Mini-HSI futures, and between standard HSI and Mini-HSI options can be fully offset, making investment more flexible.

The contract months for Mini-HSI futures and options are spot, next calendar and next two calendar quarter months. For more information, investors can refer to "Mini-Hang Seng Index Futures & Options" under "Products & Services - Derivatives Products" on the HKEX website.

What are Hang Seng China Enterprises Index futures and options? What are their characteristics?

The underlying asset of Hang Seng China Enterprises Index futures and options is the Hang Seng China Enterprises Index (commonly known as “HSCEI,”). HSCEI is a market capitalisation-weighted stock index compiled and calculated by Hang Seng Indexes Company Limited. HSCEI tracks the performance of major H shares.

HSCEI futures and options provide a risk management tool for investors. HSCEI futures and options may to be used to implement hedging strategies (to protect a portfolio of H shares against a declining market) or spread strategies (to profit from the relative performance of two markets, eg HSCEI vs HSI). In addition, HSCEI futures and options allow investors to track the performance of H-share companies in a cost-effective way since the capital outlay is less than that required to buy a basket of HSCEI constituent stocks.

The contract multiplier for HSCEI futures and options contracts is HK$50 per index point. The contract months for futures contracts are spot, next calendar and next two calendar quarter months. The contract months for short-dated HSCEI options are spot, next two calendar and next three calendar quarter months, whereas those for long-dated options are the next three months of June and December.

For more information, investors can refer to "HSCEI Futures & Options" under "Products & Services - Derivatives Products" on the HKEX website.

What are Mini-Hang Seng China Enterprises Index futures? What are their characteristics?

Mini-Hang Seng China Enterprises Index futures were launched on 31 March 2008. The value of one Mini-Hang Seng China Enterprises Index futures contract is one-fifth the value of an Hang Seng China Enterprises Index futures contract. Mini-Hang Seng China Enterprises Index futures have been designed to provide an effective trading and hedging tool for investors interested in tracking the H-shares market with a smaller amount of capital than is required for Hang seng China Enterprises Index futures and to complement the trading of Hang Seng China Enterprises Index futures and option contracts.

The contract months for Mini-Hang Seng China Enterprises Index futures are spot, next calendar and next two calendar quarter months. For more information, investors can refer to "Mini-Hanng Seng China Enterprises Index Futures" under "Products & Services - Derivatives Products" on the HKEX website.

What are Flexible Index Options? What are their characteristics?

Flexible Index Options was introduced on 8 February 2010. Flexible Index Options are Hang Seng Index and Hang Seng China Enterprises Index options contracts which allow market participants to request customised strike prices and expiry months, provided the contracts are bought and sold through the block trade facility.

Some key features of Flexible Index Options are listed below:

Series are created upon the request of an Exchange Participant according to the stipulated procedures and criteria;
Strike prices are in whole index points and subject to other limitations;
Expiry must be on the second to the last trading day of any calendar month and is subject to other limitations;
A series will not be created if there is a standard series with the same strike price and expiry;
Transactions must be through block trades of 100 contracts or more;
No market making as execution is confined to block trades;
Exchange fee, Securities and Futures Commission levy, trading hours, exercise style and settlement method are the same as standard series. Position limits and reporting requirements are also the same and in combination with the standard series; and
There are appropriate risk management measures in place to safeguard the integrity of the clearing house, which is owned and operated by HKEX.

For further details about Flexible Index options, investors can refer to "Equity Index Products" of "Derivatives Products" under the "Products & Services" section on the HKEX website.

What are Dividend Futures? What are their characteristics?

Dividend Futures are based on dividends payoff of stock index constituents over one calendar year.

HSI Dividend Futures and HSCEI Dividend Futures were introduced on 1 November 2010. The underlying assets are the HSI Dividend Point Index and HSCEI Dividend Point Index respectively, which are calculated by Hang Seng Indexes Company Limited. They measure the total cash dividend value for all constituent stocks of the underlying index – the Hang Seng Index and the Hang Seng China Enterprises Index (H-shares index) – expressed in terms of index points.

Dividend futures are designed to provide investors a tool to hedge the dividend risk of Hong Kong-listed stocks and to complement the existing range of HSI and HSCEI products. The contract multiplier is HK$50 per index point. The minimum fluctuation is 0.01 index point. The listed contract months are the three nearest December contract months (for example, Dec 2010, Dec 2011 and Dec 2012).

For more information, investors may refer to “Dividend Futures” under "Products & Services - Derivatives Products” of the HKEX website.

What are HSI Volatility Index Futures? What are their characteristics?

HKEX introduced trading of HSI Volatility Index (VHSI) Futures on 20 February 2012. The VHSI, which is compiled by Hang Seng Indexes Company Limited, measures the expected volatility of a hypothetical 30-day at the money Hang Seng Index (HSI) options and is quoted in percentage points. The VHSI is calculated based on the Chicago Board of Options Exchange’s Volatility Index (VIX) methodology with modifications, taking into account the trading characteristics of the HSI options market.

VHSI is a direct reflection of the level of short term volatility in the Hong Kong stock market and VHSI Futures give investors a convenient and cost-effective way to hedge and manage volatility exposure.

For more information, investors may refer to “HSI Volatility Index (VHSI) Futures” under "Products & Services - Derivatives Products” of the HKEX website.

What are BRICS Futures? What are their characteristics?

The five exchanges, BM&FBOVESPA from Brazil, Open Joint Stock Company "Moscow Exchange MICEX-RTS" from Russia, BSE Limited from India, HKEX as the initial China representative, and JSE Limited from South Africa, formed the BRICS Exchanges Alliance. In the initial stage of implementation, the exchanges aim to expand their product offerings beyond their home markets and give investors of each exchange exposure to the dynamic, emerging, and increasingly important BRICS economies.

The benchmark equity index futures, including Brazil's IBOVESPA futures, Russia's MICEX Index futures, India's S&P BSE SENSEX Index futures and South Africa's FTSE/JSE Top40 futures, commence trading on the HKEX market on 30 March 2012. They are cash settled futures contracts traded in HKD; the trading hours and holiday schedule follow HKEX’s existing market practice. The contract design enables convergence with home market contracts in terms of last trading day and final settlement price.

For more information, investors may refer to “BRICS Futures” under "Products & Services - Derivatives Products” of the HKEX website.