Hedging and Synthetic Funds Creation in the China Market

Journal of Indexes, pp. 50-55, September/October 2010

NYU Poly Research Paper

9 Pages Posted: 27 Aug 2010 Last revised: 23 Jan 2012

Ronald T. Slivka

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Xin Li

International Monetary Fund (IMF)

Date Written: August 26, 2010

Abstract

Following a meeting of the US-China Strategic & Economic Dialogue in Beijing on May 25, 2010, China reported that it will permit QFIIs (qualified foreign institutional investors) to use the newly created CSI 300 Stock Index futures that began trading on the CFFEX (China Financial Futures Exchange) on April 16 of this year. To accommodate expanded usage by QFIIs, the quota assigned for use by these institutions was raised to $30 billion, which may seem like a large sum but in fact is a very small part of the $2.7 trillion in China stock market capitalization. Nevertheless, this announcement, which further opens capital markets in the world’s third-largest stock market, will allow foreign investors to expand their use of derivatives to hedge their investment risks and to create new investment products. Martin Currie, Aviva Investors and AMP Capital, all QFIIs, agree that the use of stock index futures will enable them to hedge country risks and compete with China’s domestic money managers as investments in China’s markets expand. Following the pattern of development in other new futures markets, the primary uses by such institutional investors for these derivative instruments will be to hedge assets under management and to develop new investment products. This article focuses on professional uses for CSI 300 futures that are likely to emerge in the very near future.

Keywords: China, stock index futures, arbitrage, hedging, index fund, CSI300

Suggested Citation

Slivka, Ronald T. and Li, Xin, Hedging and Synthetic Funds Creation in the China Market (August 26, 2010). Journal of Indexes, pp. 50-55, September/October 2010; NYU Poly Research Paper. Available at SSRN: https://ssrn.com/abstract=1666210

Ronald T. Slivka (Contact Author)

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States
2153213524 (Phone)

Xin Li

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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