Name: Ngai Michael (3035939884)

Analysis of factors affecting Hang Seng Index (HSI):

Global & China Economies have experienced a recession in the past few years as a result of the pandemic, supply
economy chain disruption, trad and monetary policies. In 2023, the world economy has shown a gradual
recovery in GDP and economic activities. As HSI is highly correlated with the global and China
economy, majors banks such as HSBC, JP Morgan are having an optimistic outlook for HSI.

Inflation & Hyperinflation will increase people’s cost of living while interest rate will affect the cost of
Interest rate borrowing and hence corporate activities. Since the US CPI is cooling down, the market has
expected FED to slow down its pace in raising interest rate and given a positive reaction.

HK Government HK government policies on trade, taxation and investment may affect the corporate earnings and
policies investor’s confidence. As HK recently reopened its border with mainland and launched “Quality
Migrant Admission Scheme”, it is expected to stimulate HK economy and satisfy the labour
demand after a large-scale immigration.

Geopolitical risks Tension among China and other countries may impact the HSI performance. However, except
for the ongoing Ukrainian-Russian War, there are no major political conflicts that seems to exert
a huge risk on HSI.

Case scenario:
From the above analysis and graphs in the Appendix, we can notice that the recent 3-month movement of HSI has been
less volatile. Despite some pullbacks and market uncertainty, it is reasonable to expect the market has gradually priced
in most of the market news and strived for an equilibrium. Therefore, unless black swan occurs, it is likely the market
will be slightly to moderately bullish.

Probability Price Target (in two months)

Bull case 20% 22000
Base case 60% 21200
Bear case 20% 19700

Derivative Strategy + Investment Horizon: Written collar in a two-month investment horizon

Strategy (Written collar) Strike price Cost (Premium) Maturity
Long call 20600 481 27 April 2023
Short put 19800 -553 27 April 2023

Rationale: Given the bullish market forecast, I buy a call at a strike price of 20600, which tries to capture as much upside
potential as possible. I also short a put at a strike price of 19900. It is slightly higher than the price targets from the bear
case given it only has a probability of 20%. As a result, I can receive put premium from the short put to compensate
my call premium while enjoying an unlimited upside potential. Moreover, A two-month investment horizon is chosen
to avoid the undesirable volatility.

Expected payoff diagram

- Assume a risk-free rate of 4.5%, a simple monthly interest rate, and a multiplier of 1 for simplicity

➔ Expected profit = $692.54 (See appendix for calculation)

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 Name: Ngai Michael (3035939884)

Comparing different strategies (bullish strategies only):

Written collar - Unlimited potential

- Cheaper cost (receive premium from short put)
- Though short put may force us to buy the index (ETF), with a safe strike price, we can
manage the risk confidently

Long future - Unlimited upside potential but with an obligation

→ if the index price decreases a lot, we will be forced to buy the index at a higher cost than
short put whose strike price is lower than the future price

Long call - Unlimited upside potential but expensive premium

Short put - Maximum gain is the put premium received → forgo a huge upside potential

Bull spread - Limited upside potential

- Rely on the assumption that the index price will not move a lot → hard to guarantee

Straddle - Expensive premium and requires great volatility → violate the prediction

Strangle - Lower cost than straddle but still requires great volatility → violate the prediction

Appendix:

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https://www.coursehero.com/file/194488905/FINA2322-Homework-3pdf/
 Name: Ngai Michael (3035939884)

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