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Single Stock Futures Educational Seminar. Magnus de Wet, James Boardman, Rudolf Oosthuizen 10 March 2011. Agenda 201. Introduction New market- new ways of trading – why then and why now? What is an Exchange for? Central order book Pricing and trading futures- Rudolf Futures vs CFD’s - PowerPoint PPT Presentation
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Copyright© JSE Limited 2008
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Magnus de Wet, James Boardman, Rudolf Oosthuizen
10 March 2011
Single Stock Futures
Educational Seminar
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Agenda 201
Introduction
New market- new ways of trading – why then and why now?
What is an Exchange for?
Central order book
Pricing and trading futures- Rudolf
Futures vs CFD’s
CFD’s worked examples vs Futures on interest costs
How to trade on the market
Costs associated with trading
Questions & Contact Details
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Agenda
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Markets in the US have evolved
From this
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Where people would behave like this
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To this- a lot quieter and calmer and more efficient
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A level playing field
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SSF: Introduction
JSE’s 5 Markets
• Equity Market
• Equity Derivative Market
• Commodity Derivative Market
• Currency Derivatives
• Interest Rate Derivative and Spot
Derivative
• A financial instrument that derives its value from the value or return of another asset.
2 Most popular derivatives at the JSE:
• Futures
• Options
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SSF: Derivatives within the JSE (2009 Financials)
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SSF: Parties involved with Derivative Trading
JSECentral Counterparty
Client A
BuyingMember A
ClearingMember A
DataVendors
Client B
SellingMember B
ClearingMember B
Cash Flows
Ca
sh
F
low
s Cash Flows
Da
ta
Trading Trading
Ca
sh
F
low
s
Ca
sh
F
low
sC
as
h
Flo
ws
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SSF: Guarantee Hierarchy
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SSF: Futures Theory
An agreement between two parties to buy/sell an asset at a certain time in the future for a predetermined price
Exchange standardise agreements/contracts
• Contract sizes (nominal) standardised
• Contracts expire every 3rd Thursday of March, June, September and December
Daily Margining (Zero Sum Game – For every winner there’s a loser)
Risk mitigated by way of Initial Margin:
• Covers exchange against default
• Worst possible loss in 1 days movement
• Returned with interest
• Approximately 10% - 20% of underlying exposure
• Gearing
How does it really work? Futures price different from spot price…
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He is very good at saying NO
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In a central order book The bank managers COMPETE on rates. Hoping for you to say YES!
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Physically settled Futures – On Futures Close Out (FCO) the buyer will buy the physical share from the seller at the closeout price (R120), reporting it to TradElect with trade type OX.
Adding the R10 profit made he only paid R110 for the share as originally agreed
SSF: Futures Example – Share Price increase
Date Equity Price
Derivative CP (MtM)
10%
Initial Margin
15%Variation Margin
Buyer Cash Flows
Seller Cash Flows
Trade Date 100 110 15 0 -15 -15
3 Months Later 110 119 0 9 9 -9
6 Months Later 105 111 0 8 -8 8
9 Months Later 115 118 0 7 7 -7
12 Months Later – Close out 120 120 15 2 17 13
Profit/Loss 20 10 -10
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SSF: Futures – Share Price decrease
Date EQ Market
CP
Derivative CP (MtM)
10%
Initial Margin
15%Variation Margin
Buyer Cash Flows
Seller Cash Flows
Trade Date 100 110 15 0 -15 -15
3 Months Later 90 97 0 13 -13 13
6 Months Later 95 100 0 3 3 -3
9 Months Later 85 88 0 12 -12 12
12 Months Later – Close out 80 80 15 8 7 23
Profit/Loss -20 -30 30
Physically settled Futures – On FCO the buyer will buy the physical share from the seller at the closeout price (R80), reporting it to TradElect with trade type OX.
Adding the R30 loss made he paid R110 for the share as originally agreed
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Now Rudolf is going to walk you through some useful calculations on the Time value of Money.
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Introduction to interest
+(50% or 0.50)
= +
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Introduction to interest
Initial Value Return % Extra Return Total R 100.00 50% R 50.00 R 150.00
R100*(1+50%) = R150
Initial Value Return % Extra Return Total R 150.00 50% R 75.00 R 225.00
R100*(1+50%)^2 = R225
R100*(1+50%)^3 = R337.50
Initial Value Return % Extra Return Total R 225.00 50% R 112.50 R 337.50
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Introduction to interest
Compounding returns
What is Prime? 9%
9%/12 = 0.75% per Month
R100*(1+R)^t = ?
R100*(1+0.75%)^12
R100*(1+0.09/12)^12 = R109.38
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Starting Value Rate % Compounding1Year Value R 100.00 9% 1 R 109.00
Starting Value Rate % Compounding1Year Value R 100.00 9% 2 R 109.20
Starting Value Rate % Compounding1Year Value R 100.00 9% 12 R 109.38
Starting Value Rate % Compounding1Year Value R 100.00 9% 365 R 109.42
Starting Value Rate % 1Year Value R 100.00 9% R 109.42
R 109.4162
R 109.4174
Compounding
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Credit Risk
Repo = 6.5%Prime = 9% 3.5%
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( )
Interest formulas
Formula for Interest =
Can work out returns
R
N )( 1
(T*N)
=CV FV)(1
( )
EXP* (R ) = FVCV ( )T* LN
**
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Deriving future prices
2 Mar 2011
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Current date Expiry Date Compounding Date Diff Years2011/03/02 2011/06/16 12 0.2904
Spot Bid Future Bid Difference % Interest Year R 366.50 R 371.31 R 4.81 4.50%
Spot Offer Future Offer Difference % Interest Year R 367.00 R 372.99 R 5.99 5.59%
Spot Spread Future Spread Spot Spread % Future Spread % R 0.50 R 1.68 0.14% 0.45%
Deriving future prices
16 Jun 2011 Expiry
% Interest 1.31%
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Spread Cost
Offer – Bid = Spread
Spot Spread = R367.00 – R366.50 = R0.50
Cost of getting in and out
In percentage of exposure =
R0.50/((R367.00+R366.50)/2) = 0.14%
BIDOFFER
BIDOFFER
(
(
)
)
2*= Spread%
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Spread Cost
Future Spread = R371.31 – R372.99 = R1.68
In percentage of exposure =
R1.68 /((R371.31+R372.99 )/2) = 0.45%
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Current date Expiry Date Compounding Date Diff Years2011/03/02 2011/06/16 12 0.2904
Spot Bid Future Bid Difference % Interest Year R 366.50 R 371.31 R 4.81 4.50%
Spot Offer Future Offer Difference % Interest Year R 367.00 R 372.99 R 5.99 5.59%
Spot Spread Future Spread Spot Spread % Future Spread % R 0.50 R 1.68 0.14% 0.45%
Deriving future prices
16 Jun 2011 Expiry
1 Market maker
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Deriving future prices
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Deriving future prices
17 Mar 2011 Expiry
10 Market maker
Current date Expiry Date Compounding Date Diff Years2011/03/02 2011/03/17 12 0.0411
Spot Bid Future Bid Difference % Interest Year R 366.50 R 367.33 R 0.83 5.52%
Spot Offer Future Offer Difference % Interest Year R 367.00 R 368.05 R 1.05 6.97%
Spot Spread Future Spread Spot Spread % Future Spread % R 0.50 R 0.72 0.14% 0.20%
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Market maker Double
R100R99 R101
R1.5
R1.5
R1
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Deriving future prices
2 Mar 2011
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Practice
10 Mar 2011
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Deriving future prices
17 Mar 2011 ExpiryCurrent date Expiry Date Compounding Date Diff Years
2011/03/10 2011/03/17 12 0.0192 Spot Bid Future Bid Difference % Interest Year R 352.61 R 352.68 R 0.07 1.04%Spot Offer Future Offer Difference % Interest Year R 353.15 R 353.00 R -0.15 -2.21%Spot Spread Future Spot Spread % Future Spread % R 0.54 R 0.32 0.15% 0.09%
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Dividend Neutral Contracts
Fair Value = Spot + Cost – Benefit
= Spot + Interest – Div
N-Contract = Spot + Interest
Dividends?
• AGL div assumed = 2.88 for the June Expiry
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Dividend Neutral Contracts
N- Contracts
2 Contracts
Interest agreed up front
Adjusts contract for dividend received in Spot
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Stock Dividend
AGL
AGL Dividend
R 1,000,000
AGL +
R 900,000 R 100,000 = R 1,000,000
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Price Flow
TIME
Value
R1M
R1,1M
R0.9M
R1.05M
R 0.1M Dividend
R0.1M*(1+10%*0.5) = R 0.105M
T =0.5T =1 T =0
R1.05M-0.945M = 0.105M
R0.9M*(1+10%*0.5) = R 0.945M
Adjustment down to compensate for Long holder not receiving dividend
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Spot Price and CFD Cost
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Spot and SSF Price
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Cost Comparison
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SSF: SSFs vs. CFDsSSFs
• Regulated by JSE/FSB
• Exchanged traded product
• Expiry Date= Rollover costs
• Set principle amount
• Interest agreed upfront
• Wholesale interest rates
• Best execution
• Free markets
• Transparent
• Guaranteed by SAFCOM
• No dividend paid/received
• Fungible financial instrument
• Can take physical delivery
CFDs
• Unregulated
• Trades OTC
• No Expiry Date
• Principle amount could change daily
• Interest fluctuates daily
• Retail interest rates
• No best execution obligation
• Captive markets
• Opaque
• Not guaranteed by SAFCOM
• Manufactured dividends
• Not fungible
• Never physical delivered
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SSF: Benefits and Risks associated with Futures
Benefits
• Opportunity to protect/hedge your share portfolio by trading SSFs in the same underlying share.
• SSFs incur lower brokerage costs than actually trading in the underlying shares.
• Your initial margin earns interest for the duration of your contract.
• SSFs are characteristically liquid and easily traded.
• Gearing – significant returns…
• JSE independently calculates and values positions
• Wholesale Interest Rates
• Guaranteed
Risks
• Gearing – significant losses…
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SSF: Future Educational Seminars
9 March 2011 – Single Stock Futures 101
10 March 2011 – Single Stock Futures 201
11 April 2011 – Commodity Futures
24 May 2011 – Currency Futures and Options
21 June 2011 – Introduction to Safex Style Options
19 July 2011 – Safex Style Options in Depth
23 August 2011 – Broker Showcase
20 September 2011 – Inside Options Guest Speaker
25 October 2011 – TBC
23 November 2011 – TBC
07 December 2011 – TBC
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SSF: Useful websites/tools
Equity Derivatives Market:
• www.safex.co.za/ed
Equity Derivatives Products:
• www.safex.co.za/equityindexfutures
• www.safex.co.za/options
• www.safex.co.za/idx
• www.safex.co.za/ssf
• www.safex.co.za/cando
• www.safex.co.za/dividendfutures
Equity Derivatives calculators:
• www.safex.co.za/margincalculator
• www.safex.co.za/bookingfeescalculator
Equity Derivatives Data Files:
• www.safex.co.za/contractdata
• www.safex.co.za/mtm
• www.safex.co.za/marginrequirements
• www.safex.co.za/EDMstats
• www.safex.co.za/minimums
Members
• www.safex.co.za/members
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SSF: Questions & Contact Details
Parking tickets!
Magnus de Wet
James Boardman
Rudolf Oosthuizen
• DerivativesTrading@JSE.co.za
• Options@JSE.co.za
• +27 11 520 7051
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