futures market: hong kong experience prof. stephen yan-leung cheung city university of hong kong
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Futures Market: Hong Kong Experience
Prof. Stephen Yan-Leung Cheung
City University of Hong Kong
Content
Asian Financial Crisis (1997-1998)
What happened
Consequences
Aftermath
Lessons
What Happened?
Inflated asset price– Fell by 60%
Potential recession– 1998 Q3 GDP ↓6.9%
Other Asian currencies have sharply depreciated Market perceived that HK dollar was undervalued Hong Kong dollar is linked with US dollar with
US$1 vs HK$7.8
What Happened? Pressures began in October 1997 on the forward
rates for the HK dollar and regulated in a sharp full in equity market
Pressures continued periodically through the first half of 1998– Weakness in domestic economy– Yen had fallen to an 8-year low of 147 per US$– Renewed concerns an possible depreciation of RMB
In 1998. equity prices had fallen over 55% from their peak a year earlier, 12-month forward rate on the HK dollar was depreciated by 8% compared to 7.8 which is the official rate of HKD
Double Play
Taking short position in the equity market– Short-selling stock– Short HSI futures contract– Put option on HSI
Putting upward pressure on the forward rates for the Hong Kong dollar
→ sharp fall in equity market
Chart 1 HSIF Open Interest and 3-month Hong Kong Dollar Forward
35
55
75
95
115
135
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175
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Op
en In
tere
st (
'000
)
.
7.6
7.7
7.8
7.9
8.0
8.1
8.2
HK
$/U
S$
HSIF Open Interest 3-month HK$ forward
Chart 1 HSIF Open Interest and 3-month Hong Kong Dollar Forward
35
55
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95
115
135
155
175
9701
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Op
en In
tere
st (
'000
)
.
7.6
7.7
7.8
7.9
8.0
8.1
8.2
HK
$/U
S$
HSIF Open Interest 3-month HK$ forward
Chart 2 HSIF Volatility and 1-month HIBOR
0%
2%
4%
6%
8%
10%
12%
14%
16%
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Vo
lati
lity
.
-15
-5
5
15
25
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45
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HIB
OR
(%
)
HSIF Volatility 1m HIBOR
Currency market
Short position in the HK dollar may have established to over US$ 10 billion (6% of GDP) by institutions– SWAP-driven issuance of HK dollar dominated
securities by international financial institutions in the first eight months of 1998
– Concentrated selling intended to move the exchange rate beyond the official exchange rate
– Market rumors on devaluations of the HK dollar
Derivatives market
Activity on HSI futures contract rose from April to August 1998
4 hedge funds whose futures and options positions accounted for 40% in early August 1998
Their positions accounted for 49% of the total; one fund accounted for one-third
Source: Report of the Work Group on Highly Leveraged Institutions (Financial Stability Forum 2001, BIS)
Consequences
HKSAR government’s intervention in the market during 14-28 August, US$ 15 billion in equities, led to the creation of HK tracker fund
Subsequent improvement in the global outlook, the large hedge fund HSI futures positions were mostly unwound in October
Risks
Futures market
– Concentration risk, a big concern?
– Definitely yes for the economy, because of systematic risk
Aftermath
Open position limit
Margin requirement
Super-margin requirement
Lessons (1)
Communication channels between HKFE and SFC
Coordination between regulators
– Cross-market surveillance Committee
Market Intelligent System
Lessons (2)
Education on products
Investors
Regulators
Intermediaries
‘Big elephant jumped into a small pond.’
~ END~
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