The relationship between exchange-traded investment products and their over-the-counter (OTC) market counterparts is the focus of a new educational article by Dr. Joseph Fung, an Associate Professor in the Department of Finance and Decision Sciences at Hong Kong Baptist University's School of Business, and Mr. Kevin Cheng, Vice President, Market Development and Education in Hong Kong Exchanges and Clearing Limited's (HKEx) Exchange Business Unit.

The article explains how investors can use exchange-traded products to replicate OTC transactions while retaining the advantages of flexibility, daily settlements, price transparency and the financial protection of the exchange environment.

The authors explain caps, floors and collars and how to replicate them. They also examine the nature of interest rate swaps and HIBOR Futures Strips, and they highlight the advantages of exchange-traded products versus OTC products.

The article says "popular OTC strategies such as caps, floors and collars are essentially options strategies that mimic exchange-traded options, while being tailored to directly fit specific needs of a customer."

It also says "the key advantages provided by exchange-traded products, including flexibility, daily settlements, price transparency and financial protection may outweigh the benefits of customised products. Hence, every risk manager/investor is recommended to consider his options in building an appropriate strategy."

"Exchange-traded Instruments Form the Basis for OTC Products" is the latest in a series of educational articles aimed at enhancing public understanding of the derivatives markets and the important role they play in Hong Kong.

The article is available on the HKEx website http://www.hkex.com.hk. Past educational articles are also available on the website.