Understanding

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Understanding H-shares Index Futures Nov 03
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H-shares Index Futures will commence trading on
8 Dec 03
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Agenda

• The underlying index under microscope
• Why launch the product?
• How does H-shares Index Futures work for you?
• Key product features
• Trading and settlement arrangements
• Market information
• Incentive and reward programmes

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What are H Shares?

• Special Renminbi-denominated ordinary shares
  issued by China enterprises
• Listed and traded in Hong Kong dollars on the
  Stock Exchange of Hong Kong (SEHK)
• A total of 84 H shares (60 and 24 on Main Board
  and GEM respectively) listed on SEHK as at the
  end of Oct 03

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The Underlying Index (Hang Seng China Enterprises
Index / HSCEI) under Microscope
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HSCEI

• A market capitalisation weighted index compiled
  by HSI Services Ltd.
• Comprises 32 constituent stocks (as of 31 Oct 03)
• Covers all H shares in the Hang Seng Mainland
  Composite Index

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• Current index level at 3,862 with a market
  capitalisation of HK241.8 bn (as of 31 Oct 03)
• Market capitalisation of HSCEI constituents was
  91.4 of total market capitalisation of all H
  shares in Oct 03
• Turnover accounted for 15.7 of total market
  turnover in Oct 03
• All the 32 HSCEI constituents are eligible for
  short selling

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Top 10 HSCEI Constituents (as of 31 Oct 03)
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Selection Criteria

• All H Shares in the Hang Seng Mainland Composite
  Index
• Selection criteria of Hang Seng Mainland
  Composite Index Constituents derive at least 50
  of their sales revenue from Mainland China

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HSCEI vs HSI

• HSCEI measures the overall share price
  performance of the constituents which are
  enterprises incorporated in China and listed in
  Hong Kong
• With their assets and business mainly located in
  China, the overall performance of these companies
  depends crucially on the political and economic
  situation in China

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HSCEI vs HSI

• By comparison, HSI reflects the overall
  performance of a group of Hong Kong listed
  companies. The performance of HSI constituent
  companies mostly hinges on the economic growth in
  Hong Kong and China

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HSCEI vs HSI(as of 31 Oct 03)
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Performance of HSCEI and HSI (96/97)
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Performance of HSCEI and HSI (02/03)
Up to 31 Oct 03
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Volatility of HSCEI and HSI (96/97)
Annualized 20-day volatility
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Volatility of HSCEI and HSI (02/03)
Annualized 20-day volatility
Up to 31 Oct 03
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HSCEI vs China-related Indices
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Sensitivity of HSCEI Constituents (as of 31 Oct
03)
Change in HSCEI (points) per spread change in
stock price
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Why Launch the Product?
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• Rising interest in the global and local investing
  community (after Chinas entry into the WTO) on H
  shares

Monthly Turnover of HSCEI (Jan 02-Oct 03)

• Average Daily Volume
• 0.57bn
• 1.33bn
• 133
• Up to Oct 03

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• Offer a risk management tool to effectively hedge
  H shares portfolio
• Facilitate investors to establish broad market
  exposure linked to the performance of H-share
  companies
• Strengthen Hong Kongs role as the preferred
  international capital formation centre for
  Mainland China enterprises by enhancing the
  liquidity of the H shares market

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How does H-shares Index Futures Work for You?
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Capture H Shares Market Movements
Bullish
Long Futures
HSCEI
Bearish
Short Futures
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Example Long a H-shares Index Futures contract
Profit/Loss ()
100
50
0
-50
14.3
Futures Price
-100
3,000
3,250
4,000
3,500
3,750
-14.3
Assuming clients margin is HK25,000
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Provide Insurance for H Shares Portfolio
Short Hedge
Sell futures to avoid losses from downward price
movements in H shares
Purchases futures to protect against upward price
movements in H shares
Long Hedge
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• Example short hedge
• An investor is holding a H-share portfolio (worth
  HK175,000) similar to the constituent stocks of
  HSCEI.
• Anticipates a short-term decline in the stock
  market.
• Hedges his position by selling one futures
  contract at 3,500 points.

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• If the market drops by 5 to 3,325 points as
  anticipated during contract expiry, then
  portfolio value falls to HK166,250.
• Gains HK8,750 (175 points x HK50) from his
  futures position.
• Gain in futures position offsets loss in
  portfolio value. Overall portfolio value remains
  at around HK175,000.

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• If the market rises by 5 to 3,675 points during
  contract expiry, then portfolio value increases
  to HK183,750.
• Loses HK8,750 (175 points x HK50) from his
  futures position.
• Increase in portfolio value offsets loss in
  futures position.

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Trade on the Relative Strength of H-shares Index
Futures and HSI Futures

• Inter-market spread trading H-shares Index
  Futures and HSI Futures
• How to profit from the expectation that H-shares
  Index Futures will outperform HSI Futures or vice
  versa?
• Strategy Buy the outperformed index futures and
  sell the underperformed index futures, no matter
  whether the market rises or falls (total contract
  value for long and short positions should be
  roughly equal)

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Performance of HSCEI and HSI (2/1/03 - 31/10/03)
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Example H-shares Index Futures will out-perform
HSI Futures
Exclude brokers commission and trading fees and
levies
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• Key Product Features

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• Underlying Index
• Hang Seng China Enterprises Index
• Contract Multiplier
• HK50 per Index point
• Contract Months
• Spot, next calendar, and the next two calendar
  quarter months

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• Position Limits
• 6,000 net long/short contracts in any one
  contract month, per Exchange Participant or per
  client
• Large Open Positions
• 250 net long/short contracts in any one contract
  month, per Exchange Participant or per client

Change to 500 effective 12 Dec 03
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• Trading and Settlement Arrangements

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Trading Arrangement

• Trading platform - HKATS
• Trading symbol HHI (Hangseng H-share Index)
• Trading hours - same as HSI Futures
• 945a.m. - 1230p.m.
• 230p.m. - 415p.m.

No pre-market trading session The trading
hours will be up to 400p.m.on the Contract
Expiry Day
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• Last Trading Day the second last business day
  of the contract month
• Trading Fees and Levies

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Clearing Arrangement

• Final Settlement Day the last business day of
  the contract month
• Final Settlement Price the average of the
  values of the HSCEI taken at 5-minute intervals
  during the Last Trading Day
• Settlement method cash settled

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• Market Information

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List of Information Vendors for H-shares Index
Futures
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• HKEx website (www.hkex.com.hk)

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http//www.hkex.com.hk/futures/futuresproduct/hhi_
fut.htm
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• Incentive and Reward Programmes

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Incentive Programme for Investors

• HKEx to give away 1,600 supermarket coupons to
  the first investors who trade H-shares Index
  Futures through a client account by awarding a
  50 coupon for each contract bought or sold
• Not applicable to block trades and average price
  trades
• SFC Levy exempted for 6 months (8 Dec 03 to 7 Jun
  04)

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Reward Programme for Participants

• A reward of HK2.5 to Participants for each
  H-shares Index Futures contract traded via client
  accounts from 8 Dec 03 to 7 Mar 04
• Not applicable to House or RT accounts
• Reward to be distributed to eligible Participants
  in 2 weeks time after the end of each calendar
  month

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Appendix - HSCEI Constituents (as of 31 Oct 03)