Product Descriptions 
28/04/2003 
 

HIBOR Futures

Hong Kong Interbank Offered Rate (HIBOR) is the rate on which Hong Kong dollar-denominated instruments are traded between banks in Hong Kong. Fixing rates (ranging from 1 to 12-month) are set at 11:00 a.m. (Hong Kong time) based on HIBOR quotations provided by 20 banks designated by the Hong Kong Association of Banks (HKAB). By eliminating the three highest (or in the case of equality, three of the highest) and the three lowest (or in the case of equality, three of the lowest) of such HIBOR quotations, the arithmetic mean of the remaining 14 offered rates for each period (rounded up to five decimal places) shall represent the HKAB interest settlement rates.

With the unsettling events in the Asian currency markets since 1997, Hong Kong dollar interest rate fluctuations have increased. Hong Kong dollar investors are increasingly concerned with interest rate volatility and are employing different risk management tools to hedge their exposures. This reinforces the value of interest rates futures as effective hedging instruments.

The One-Month HIBOR and Three-Month HIBOR futures contracts are based on the One-Month and Three-Month HIBORs, which are the benchmarks for short-term interest rates in the Hong Kong dollar money market.

HKFE's introduction of One-Month HIBOR futures contracts on 20 October 1998, and Three-Month HIBOR futures contracts on 26 September 1997 provides a set of interest rate products which allow market participants to manage their interest rate exposures more effectively.


Applications of One-Month and Three-Month HIBOR Futures

  • Hedging Interest Rate Movements
    One-Month and Three-Month HIBOR futures contracts can be used by investors as effective instruments for hedging their Hong Kong dollar assets and debt obligations against the fluctuation of Hong Kong interest rates.

    As a rise in interest rates will increase the financing cost for investors to rollover maturing loans in the future, borrowers can sell One-Month or Three-Month HIBOR futures contracts to hedge their future positions. If interest rates had risen at the renewal of loans, the profits from closing out One-Month or Three-Month HIBOR futures positions can recover part or all of the higher interest charges.

    To protect against a fall in interest rates that will affect interest incomes when investors try to renew or arrange time deposits in the future, investors can buy One-Month or Three-Month HIBOR futures contracts to lock-in forward deposit rates. If interest rates fall at the renewal or arrangement of time deposits, the profit from closing out One-Month or Three-Month HIBOR futures positions can recover part or all of the loss of the lower deposit interest receipts.
  • Directional Trading
    To trade the movement of Hong Kong interest rates, investors can use One-Month and Three-Month HIBOR futures contracts to hedge their exposures from one month to two years by trading a series of contracts. Investors who anticipate a fall in interest rates can profit from it by buying One-Month or Three-Month HIBOR futures contracts. If interest rates decline, prices of One-Month or Three-Month HIBOR futures contracts will increase. On the other hand, investors who expect a rise in interest rates can also profit from it by selling One-Month or Three-Month HIBOR futures contracts. If interest rates rise, prices of One-Month or Three-Month HIBOR futures contracts will decrease.
  • Spread Trading
    One-Month and Three-Month HIBOR futures contracts provide investors with an increased number of spread trading strategies. Investors can employ yield spread trading (buy and sell different contracts at the same time) when they believe the spread between the One-Month HIBOR futures and Three-Month HIBOR futures will change. These contracts can also be used to achieve inter-market spread trading between two short-term interest rate futures contracts such as Three-Month Eurodollar futures and HIBOR futures.
  • Strip Trading
    The Strip facility allows placing of buy / sell orders for a consecutive series of HIBOR futures contracts. Using this facility, investors are able to trade or hedge the HK$ interests rate risk of up to one year within a single trade. A One-Month HIBOR Strip composes of three consecutive contract months while a Three-Month HIBOR Strip composes of four consecutive quarterly contract months.

    For example, on the 26 September 2000, the One-Month and Three-Month HIBOR Strips composed of the following contract months:

    One-Month HIBOR Futures
    Strip 1: October 2000, November 2000 and December 2000
    Strip 2: January 2001, February 2001 and March 2001.

    Three-Month HIBOR Futures
    Strip 1: December 2000, March 2001, June 2001 and September 2001
    Strip 2: December 2001, March 2002, June 2002 and September 2002.

    On the expiry of the first contract month in each of the Strip, two new Strips will be introduced.
  • Better Hedging for Forward Rate Agreements (FRAs)
    One-Month and Three-Month HIBOR futures contracts allow users to hedge against the movements of regular FRAs as well as very short-dated FRA positions. By combining One-Month and Three-Month HIBOR futures contracts with different maturity periods, investors can hedge against a wide array of FRA positions as illustrated by the following table:

    1 x 2          
    1 x 3 2 x 3        
    1 x 4* 2 x 4 3 x 4      
    1 x 5 2 x 5* 3 x 5 4 x 5    
    1 x 6 2 x 6 3 x 6* 4 x 6 5 x 6  
    1 x 7 2 x 7 3 x 7 4 x 7 5 x 7 6 x 7

    * Those can be hedged by using combinations of One-Month HIBOR futures contracts or single Three-Month HIBOR futures contracts. Thus, exchange-traded HIBOR futures contracts provide users with a complete set of front-end yield curve risk management tools.