Presentation to Online Share Trading 1 Features & Benefits A listed futures contract that allows: Allows RSA Citizens to hedge exposures to fluctuations in exchange rates, such as foreign holidays and off-shore investments. Take a view on the currency Liquidity provided by market makers The ability to input your own bids and offers 2 1
Features & Benefits Gearing or Leverage of approximately 10 times Ability to trade with local counterparts Only settles in rand, so no impact on your off-shore allowance Small contract size of only $1000.00 3 The FX Market Largest Market in the World 2004 BIS survey USD 1.9 trillion per day Hedge funds and web based electronic trading has greatly increased volume In SA +/- USD 10 billion a day, more than 10 times the JSE trading volumes Operates 24 hours a day Locally Monday Friday 9am 5pm Always involves 2 currencies If you buy one then have sold the other 4 2
Participants People looking to hedge their exposures such imports and exports Central Banks looking to influence FX rates Capital and Portfolio flows Some times hot money Funds wish to arbitrage between cash and derivative markets Retail clients; Speculator Hedging 5 Factors that influence FX Rates Exchange rate determined by demand and supply Demand and supply influenced by: Economic Factors Sentiment Technical Factors & Micro-structure 6 3
Base Currency vs Quoted Currency Exchange rate, ratio of exchange between two currencies USD 1 = ZAR 7.0512 Base currency Quoted currency 7 Bid Offer If a price is quoted USDZAR 7.0512/0812 At 7.0512 Market Maker buys USD, this where a client can sell USD At 7.0812 Market Maker Sells USD, this where a client can buy USD 8 4
Structure of the FX Market Spot Outright Forwards or FEC s A future is an exchange listed forward 9 Spot FX Rates quoted on TV, internet etc Spot Foreign Exchange Outright purchase or sale of one currency for another Spot delivery - two business after transaction date T+2 10 5
Forwards vs. Futures Futures Exchange Traded Standardised Dates Std Quantities Cash settled Margin Requirements Forwards OTC Any Dates Any Quantities Exchange of CCY Require Credit Limits 11 What is a Future? A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. Exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, etc 12 6
Rand Future Contract Value $1 000.00, Quoted in Rands per Dollar Expiries March, June, September and December Cash settled NB no delivery of foreign currency! 13 Fair value of a future An importer needs $1m in 3 months time to pay for imports - Buy $ now, by raising funds in in Rand and place it it on deposit Current spot rate USD/ZAR = 7.1500 3m interest ratesus = 5.25% SA = 11.50% Number of of days = 91 Today $1,000,000 R7,150,000 7.1500 FV = PV + Int 3 months time $1,013,271 R7,354,999 7.2587 14 7
Fair value of a future F = 11.5 5.25 7.15x 1 + x 100 100 91 365 F= S* [(1+ (rd-rf)) *T] = 7.2614 Where: S =7.1500 T =91 days rd =11.5% rf =5.25% 15 Dealing in a Future Open a position by buying or selling Close out by doing the opposite Can put in bids and offers Must deal through a broker Rand Future designed for the retail market 16 8
Margining The Clearinghouse guarantees all trades by demanding margin from both parties, Removes the risk of counterparties not meeting their obligations. Think of margin as a good faith deposit. 3 Types of Margin Initial Margin Variation Margin Brokers Maintenance Margin 17 Initial Margin Good faith deposit Remains on deposit as long as the position is open It will earn a SAFEX rate of interest Returned when the position is closed out or the contract expires Will be about R700, based on Rand value 18 9
Initial Margin Example If we say the initial margin is 10% of Rand value and the Rand future is trading at R7.0000 then the initial Margin per contract is: R700.00 The exchange will keep this constant for the month. It will change on a monthly basis 19 Mark-to-Market (MTM) Variation Margin Compare MTM rate to previous MTM rate for existing positions, & where the future was traded for new positions Profit/Loss debited or credited to trading account Spot prices being taken from Reuters D3000 for MTM to be determined, then adjusted by forward points 20 10
Maintenance Margin Maintenance Margin Buffer to avoid frequent calls from your broker When this happens, it is known as a "margin call. Note you are liable for all losses, even if they exceed your margin 21 Key Points Margining is the means by which the exchange ensures that buyers and sellers have enough money to meet their obligations. An initial investment is required when you open a position (initial margin). You earn interest on any margin kept in the account. If the margin in your account falls below the maintenance margin level, your broker will issue a margin call, will result in you having to liquidate positions or add more cash to the account. Brokers may be able to close you out without consulting you. Keep excess cash in the trading account. 22 11
Clearing House Clearing Member Margin Paid Clearing Member Margin Paid Trades Booked Trades Booked Broker Margin Paid Broker Margin Paid Buyer Seller Deal 23 Hedging Family Planning a Skiing trip, Approximate Cost $10,000. Buy 10 Contracts at 7.0000 Before they fly out sell the contracts at 7.50 Profit on Hedge 10,000 x (7.5-7.00)= R5,000 Buy Travellers Cheques at 7.50 cost R75,000 Net Cost R70,000 24 12
Hedgers 2 The Example ignored bid offer spread between sale of future and purchase of travellers cheques, would have existed at the start anyway. However lose value of forward points, but paid only 10% deposit Still better than no hedge 25 Risks Gearing means we can lose significant amounts, if not more than the margin There are moments of illiquidity under stress conditions Bid offer spreads widen Market gaps Stop loss orders not fixed price guarantee 26 13
Risks Trading hours Global currency markets open Monday at 5am in Sydney closing at 5pm on Friday in New York Local market only open Mon-Fri 9am-5pm Market could move against you while local market is closed and you will have to wait until the next days local opening to trade out 27 Futures on Yield-X Who may trade- Qualifying Clients A Resident who is a natural person (no limits applicable) Non-resident clients (no limits applicable) Pension funds and long term insurance companies; subject to their 15% foreign allocation allowance Asset managers and registered collective investment schemes subject to their 25% foreign allocation limits 28 14
Futures on Yield-X All corporate entities and trust accounts are prohibited from trading unless a valid exchange control approval (ECA) is granted by the South African Reserve Bank All authorized dealers, subject to the approval granted by the Exchange Control Department of the South African Reserve Bank, to act as market makers in the trading of currency derivatives 29 Specifications Contract Months: March, June, Sept, Dec Last trading day 2 business days prior to the 3rd Wednesday of the expiring month Online Share Trading 2 business days prior to the above 30 15
Trade in Currency Futures Retail Clients Kurt Pagel : Online Share Trading 31 Client procedure to get started A Client registration New clients All non-existing OST clients to register as OST client first www.securities.co.za > Open an Account (see slide) Once registered and FICA d, apply for Futures trading account (see slide) Existing Clients Apply for Futures trading account (see slide) 32 16
The Website How to register for an OST account Go to www.securities.co.za Click on Open an account Complete the registration as an INDIVIDUAL only. No CF trading for nonindividuals 33 The Website How to register for CF trading account 34 17
The Website How to find or trade currency futures 35 The Website Currency Futures > Quote Page 36 18
The Website Currency Futures > Quote Page (continued) 37 The Website Currency Futures > Trade Page 38 19
The Website Order Confirmation 39 40 20
41 OST trading & website costs Monthly subscription fee R54.15 Equity trade costs 0.7% (min R70) CF trade costs R20/contract (min R70) Single stock futures costs 0.4%* (min R70) * SSF fee of 0.4% is inclusive of VAT 42 21
OST contacts www.securities.co.za 0860 121 161 securities@standardbank.co.za Kurt Pagel Ridwaan Moolla Raoul Carelse 43 Wealth warning Trading currency futures can offer significant returns BUT also subject you to significant losses if the market moves against your position. You may, in a relatively short time, sustain more than a total loss of the funds placed by way of initial margin. You may be required to deposit a substantial additional sum, at short notice, to maintain your margin balance. If you do not maintain your margin balance your position may be closed out at a loss and you will be liable for any resulting deficit. 44 22
Questions? 45 Disclaimer The information and opinions stated in this document are of a general nature, have been prepared solely for information purposes and do not constitute any advice or recommendation to conclude any transaction or enter into any agreement. It is strongly recommended that every recipient seek appropriate professional advice before acting on any information contained herein. Whilst every care has been taken in preparing this document, no representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or representations. All information contained herein is subject to change after publication at any time without notice. The past performance of any investment product is not an indication of future performance. Online Share Trading is operated by Standard Financial Markets Proprietary Limited Reg. No. 1972/008305/07, a subsidiary of the Standard Bank Group Limited and authorised user of the JSE Limited. 46 23