Question 1 (20 marks)
In 2011, HSBC Holdings plc (HSBC) cited unfavourable market conditions when shelving plans to list on a proposed Shanghai international board, a move which never came to fruition. However, under the recent Shanghai-London stock connect, firms listed in Shanghai will be able to sell Global Depositary Receipts (GDRs) to investors in London, and those listed in London will be able to issue CDRs to investors in Shanghai. HSBC is set to be the first company to issue CDRs.
Reference: Reuters 2018, HSBC poised to be first firm to issue Chinese Depositary Receipts: sources. Available from: https://www.reuters.com/article/us-hsbc-listing-shanghai/hsbc-poised-to-be-first-firm-to-issue-chinese-depositary-receipts-sources-idUSKCN1MS1KM. Accessed 17 December 2018.
a. Differentiate between HSBC’s CDRs and its intended share listing on the exchange.
b. Conduct a share trade between HSBC shares listed on the HKSE and those listed on the LSE. Assume the transaction was for 100,000 shares purchased at the closing price on the HKSE on 16 November 2018 and all shares were sold at the opening price on the LSE on 17 December 2018. At what range of spot exchange rates would make the trade profitable?
You are provided with the following information:
16 November 2018 – HKD/GBP spot rate Bid 0.09950 and offer 0.09980
17 December 2018 – HKD/GBP spot rate Bid 0.10140 and offer 0.10170
HK dollar borrowing rate = HIBOR (1 month) 2.30 percent pa + 30 basis points
Word count requirement: 600. Minimum number of references: 5.
Question 2 (20 marks)
Britain’s cabinet minister, Mr Liam Fox said the Prime Minister’s Brexit deal with the European Union (EU) was unlikely to pass through Parliament. Other options include leaving the EU without a deal, another referendum, or a Norway or a Canada-style alternative deals. Norway has a very close relationship with the EU but is not a member, while Canada has an extensive trade deal with the bloc.
Reference: Bloomberg 2018, Brexit: What happens next may have to be put to MPs’ vote – Fox. Available from: https://www.bbc.com/news/uk-politics-46584654 Accessed 17 December 2018.
Amidst the uncertainty surrounding the fate of the Brexit deal, the sterling swung within a wide trading range as seen in the rates between 10 December 2018 and 19 December 2018 in the table below.
Bank dealer X performed a number of foreign currency trades on the British pounds against the US dollar during this period. She trades standard contracts (size USD100,000) with a leverage ratio of 1:200. The online broker takes a 5-pip spread on either side of the spot mid-rate. These were the dealer’s trades:
10 Dec 2018 to
19 Dec 2018 US dollars per GBP
(Spot, mid-rates) Trades
T = 0 1.2750 Sell 5 contracts
T = 1 1.2500 Buy 8 contracts
T = 2 1.2630 Sell 4 contracts
T = 3 1.2480 Buy 6 contracts
T = 4
(19 December 2018) 1.2620 Sell 5 contracts
a. Calculate the bank dealer’s net profit/loss after executing all her trades. Ignore margin considerations and other transaction costs (apart from the bid-offer spread). [8 marks]
b. In mid-June 2018, a British export firm contracted to receive USD 1 million at T=4 from its United States customer. At that time, the company obtained this information from its banker:
Spot rate : GBP1 = USD 1.3330
GBP/USD futures contract size : GBP 62,500
GBP/USD futures for delivery on 19 December 2018 : GBP1 = USD 1.3450
Explain the futures hedge mechanism for the firm and compute the company’s nett receipt (in its local currency) on 19 December 2018. Explain if this hedge was effective. [12 marks]