FIN4003 Financial Derivatives

Assignment: Group Case Study

Submission Deadline: 21 November 2022 (Monday)

You have recently joined the derivatives products division of HSU investment bank as an
analyst trainee. As part of your probationary assessment, you are asked to work with the team
to handle the following two cases in the pipeline. Satisfactory evaluation from clients and peers
about your performance must be acquired in order to pass your probationary period. Good luck!

Case 1 (50 marks)

BlueRock, 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 months. Details of the portfolio are given
as of 17 October 2022. USD/HKD exchange rate is quoted at 7.8000.

Stock Code Stock Name Currency Price Market Cap. (B) No. of Shares Beta

285 BYD Electronic HKD 17.82 40.38 300,000 0.89

700 Tencent HKD 245.20 2,339.00 100,000 0.44
941 China Mobile HKD 50.00 1,135.00 100,000 0.34
992 Lenovo HKD 5.53 67.80 800,000 1.23
1810 Xiaomi HKD 8.60 214.11 700,000 1.31
2382 Sunny Optical HKD 70.15 78.15 100,000 0.96
3690 Meituan HKD 146.00 909.13 100,000 0.84
9626 BiliBili HKD 91.05 35.86 100,000 1.19
9888 Bidu HKD 98.90 268.42 100,000 0.74
9988 Alibaba HKD 72.15 1,527.00 200,000 0.61

AAPL Apple USD 144.31 2,224.00 20,000 1.25

AMZN Amazon USD 114.10 1,089.00 20,000 1.32
CISCO CSCO USD 40.84 165.18 30,000 0.95
GOOG Alphabet USD 100.62 1,263.00 20,000 1.10
INTC Intel USD 26.46 106.39 50,000 0.71
MSFT Microsoft USD 235.54 1,705.00 10,000 0.96
NVDA NVIDIA USD 120.57 279.78 20,000 1.71
QCOM QUALCOMM USD 114.63 123.47 20,000 1.28
TSLA Tesla USD 224.01 642.33 10,000 2.13
V Visa USD 186.79 384.86 10,000 0.92

The following prices obtained from the futures markets as of 17 October 2022. The contract
specifications and other relevant information can be found in the websites www.hkex.com.hk,
www.cmegroup.com, www.hsi.com.hk, and www.slickcharts.com.

Futures Contract Spot Nov-2022 Dec-2022 Mar-2023 Jun-2023

Hang Seng Index 16,613 16,582 16,631 16,748 -

Hang Seng TECH Index 3,200 3,205 3,212 3,303 -
Hang Seng China Enterprises Index 5,633 5,646 5,666 5,739 -

E-Mini S&P 500 3,689.00 - 3,692.25 3,722.00 3,760.00

E-Mini Nasdaq-100 11,103.00 - 11,108.00 11,206.75 11,310.75
E-Mini Dow Jones Industrial 30,133.00 - 30,259.00 30,399.00 30,606.00

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a) Calculate the values of HK portfolio and US portfolio, respectively. (2 marks)

b) Calculate the weights of individual stocks. (10 marks)

c) Calculate the betas of HK portfolio, US portfolio and the aggregate portfolio, respectively.
(3 marks)

d) The fund manager would like to reduce the market risk exposure by selling shares. Why is
it impracticable to do so? Explain in details what hedging strategy you would recommend the
hedge fund. Give reasons for your choice of derivatives contracts. (10 marks)

Suppose the fund manager implemented your recommendation and would like to close out the
futures positions on 19 December 2022 using the following market prices. USD/HKD
exchange rate remains unchanged.

Stock Code Stock Name Currency Price No. of Shares Beta

285 BYD Electronic HKD 16.50 300,000 0.89

700 Tencent HKD 236.00 100,000 0.44
941 China Mobile HKD 48.60 100,000 0.34
992 Lenovo HKD 4.90 800,000 1.23
1810 Xiaomi HKD 7.70 700,000 1.31
2382 Sunny Optical HKD 64.70 100,000 0.96
3690 Meituan HKD 136.20 100,000 0.84
9626 BiliBili HKD 82.30 100,000 1.19
9888 Bidu HKD 93.00 100,000 0.74
9988 Alibaba HKD 68.60 200,000 0.61

AAPL Apple USD 150.00 20,000 1.25

AMZN Amazon USD 119.00 20,000 1.32
CISCO CSCO USD 42.00 30,000 0.95
GOOG Alphabet USD 103.90 20,000 1.10
INTC Intel USD 27.00 50,000 0.71
MSFT Microsoft USD 242.00 10,000 0.96
NVDA NVIDIA USD 126.80 20,000 1.71
QCOM QUALCOMM USD 119.00 20,000 1.28
TSLA Tesla USD 238.00 10,000 2.13
V Visa USD 192.00 10,000 0.92

Futures Contract Spot Dec-2022 Mar-2023 Jun-2023

Hang Seng Index 15,342 15,359 15,467 -

Hang Seng TECH Index 2,943 2,953 3,037 -
Hang Seng China Enterprises Index 5,168 5,199 5,266 -

E-Mini S&P 500 3,803.50 3,807.00 3,837.00 3,877.00

E-Mini Nasdaq-100 11,430.50 11,436.00 11,537.00 11,644.00
E-Mini Dow Jones Industrial 30,976.00 31,106.00 31,250.00 31,463.00

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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 1.2 and
re-allocate 30% of the US fund to the HK stock market until March 2023.

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

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

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 Case 2 (50 marks)

Suppose a private bank client has US$1,000,000 to investment. Advise the client on a
derivatives strategy that take advantage of the current market opportunity. The components of
your trading strategy could be more than one leg by using either futures or options or both. The
underlying asset is your choice.
only one good idea
a) What is the current market outlook and how does your trading strategy fit in?

b) Describe your trading strategy in details.

mporfat Hints - points to consider: xopyfommi
What is the underlying asset? e.g. commodity, stock, stock index, bond, etc.
What is the derivatives composition?
How many contracts? How is the trade structured?
How long is the maturity?
What is the cost?
How is the pricing done?
What are the upside and downside potential?
Any leverage? … etc.

The market prices can be obtained from e.g. Bloomberg, finance.yahoo.com, and exchanges
such as cmegroup.com, hkse.com.hk. A screenshot of the pricing reference must be provided
with your submission.

c) Discuss the risk, reward and breakeven associated with your trade idea.

d) Illustrate the payoff diagram and scenario analysis.

Your answers should be written in bullet points. Soft credit will be given to those who
presented the work professionally.

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