As we all know, the Hang Seng Index (HSI) is a crucial indicator of market performance in Hong Kong. Many investors want to track its movement and explore investment opportunities, given its importance. This article will compare two methods of investing in the HSI: options vs non-delivery forward contracts. We will highlight the pros and cons of each approach and help you decide which option is best for you. So, without further ado, let’s get started
What is an HSI index option, and how does it work?
An HSI index option is a financial instrument that gives investors the right, but not the obligation, to buy or sell an underlying asset (in this case, the Hang Seng Index) at a predetermined price on or before a specified date. It means you have control over when and how you can exercise your options, giving you flexibility in timing your investment decisions.
What is an HSI non-delivery forward contract?
Non-delivery forward contracts are similar to options in that they also give investors the right to buy or sell an underlying asset at a predetermined price on or before a specified date. However, unlike options, these agreements require the delivery of cash rather than physical assets; this means there is no need to invest in the underlying asset.
The benefits of using an HSI index option over a non-delivery forward contract
The main benefit of using an HSI index option over a non-delivery forward contract is that you have more control over your investments. With an option, you can choose when and how to exercise it, allowing you to adjust your strategy depending on market conditions. Additionally, options require much less capital than non-delivery forwards, as you don’t have to invest in the underlying asset.
Another significant advantage of using an HSI index option is that it allows you to capitalise on potential market movements without investing large amounts of capital. It makes options an excellent way for investors with limited funds to get exposure to the Hang Seng Index.
The benefits of using an HSI non-delivery forward contract over an HSI index option
The main benefit of using a non-delivery forward contract over an HSI index option is that it involves much less risk. Since you don’t need to invest in the underlying asset, you can’t suffer a loss if the market turns against you. Additionally, non-delivery forwards require less capital than options, as there is no need to buy the underlying asset, making them attractive to investors with limited funds.
Another benefit of non-delivery forwards is that they give you greater price certainty. Since the contract specifies when and how much the underlying asset will be bought or sold for, there is no risk of getting a bad deal if market conditions move against you.
How to trade an HSI index option
To trade an HSI index option, you first must select a broker that offers the Hang Seng Index access. You will then need to decide whether you want to buy or sell the option and the contract’s expiration date. After this, you can place your order with your broker and wait for it to be executed.
Once your order is executed, you have two options: exercise the option if market conditions are favourable or let it expire (in which case no further action is required). If you choose to exercise the option, you can purchase or sell the underlying asset at the specified price on or before the expiration date.
How to trade an HSI non-delivery forward contract
To trade a non-delivery forward contract, you must select a broker that offers access to the Hang Seng Index. You will then need to decide which asset you would like to buy or sell and the contract’s expiration date. Once this is done, you can place your order with your broker and wait for it to be executed.
Once your order is executed, all further action depends on the terms of the contract; if delivery is required, it must be made on or before the expiration date at the specified price. If delivery is not required, no further action must be taken.
Examples of how an HSI index option can be used in investment and hedging strategies
An HSI index option can be used in various investment and hedging strategies. For example, investors may use extended call options to gain exposure to the Hang Seng Index with limited capital and limit their downside risk. Alternatively, short-put options can generate income from an anticipated decline in the index. Investors who want more control over their investments may use straddles or strangles for greater flexibility.
HSI index options can also be used for hedging purposes; for example, investors exposed to the Hang Seng Index through stocks or other derivatives may purchase protective puts to protect against any declines in the market.