Download Fifth level

Single Stock Futures
Educational Seminar
Magnus de Wet, James Boardman, Rudolf Oosthuizen
10 March 2011
www.jse.co.za
Copyright© JSE Limited 2008
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
Client A
Trading
JSE
Central Counterparty
Data
Clearing
Member A
Trading
Selling
Member B
Cash
Flows
Cash
Flows
Buying
Member A
Cash
Flows
Cash
Flows
Client B
Clearing
Member B
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Data
Vendors
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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SSF: Futures Example – Share Price increase
Date
Derivative Initial
Buyer Seller
CP (MtM) Margin Variation Cash Cash
Equity Price
10%
15% Margin Flows 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
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
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SSF: Futures – Share Price decrease
Date
EQ Market
CP
Derivative Initial
Buyer Seller
CP (MtM) Margin Variation Cash Cash
10%
15% Margin Flows 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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Click to edit to
Master
title style
Introduction
interest
Click to edit Master text styles
• Second level
• Third level
» Fourth level
» Fifth level
=
+(50% or 0.50)
+
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Click to edit to
Master
title style
Introduction
interest
Click to edit Master text styles
Initial Value Return % Extra Return Total
• Second level
R
100.00
50% R
50.00 R 150.00
• Third level
R100*(1+50%) = R150
» Fourth level
Initial Value» Fifth
Return
level % Extra Return Total
R
150.00
50% R
75.00 R 225.00
R100*(1+50%)^2 = R225
Initial Value Return % Extra Return Total
R
225.00
50% R
112.50 R 337.50
R100*(1+50%)^3 = R337.50
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Click to edit to
Master
title style
Introduction
interest
Compounding
returns
Click to edit Master
text styles
R100*(1+R)^t = ?
• Second level
• Third
level9%
What is
Prime?
» Fourth
9%/12 = 0.75%
perlevel
Month
R100*(1+0.75%)^12
» Fifth level
R100*(1+0.09/12)^12 = R109.38
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Click to edit Master title style
Compounding
Click to edit Master text styles
• Second level
Starting
Value Rate % Compounding 1Year Value
R
• Third
level
100.00
9%
1 R
109.00
Fourth level
Starting» Value
Rate % Compounding 1Year Value
R
» Fifth level
100.00
9%
2 R
109.20
Starting Value Rate % Compounding 1Year Value
R
100.00
9%
12 R
109.38
Starting Value Rate % Compounding 1Year Value
R
100.00
9%
365 R
109.42
109.4162
Starting Value Rate % 1Year Value
R
100.00
9% R
109.4174
109.42
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Click to
edit Master title style
Credit
Risk
Click
to edit=Master
Prime
9% text styles 3.5%
Repo = 6.5%
• Second level
• Third level
» Fourth level
» Fifth level
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Click to formulas
edit Master title style
Interest
Formula
for Interest
= styles
Click to edit
Master text
Can
worklevel
out returns
• Second
• Third level
» Fourth level
R
CV* » 1
Fifth level
N
(
1
(T*N)
)
(( ) )
= FV
*
( )
CV * EXP(R*T) LN
= FV
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Click to edit
Master
title style
Deriving
future
prices
Click to edit Master text styles
2• Second
Marlevel
2011
• Third level
» Fourth level
» Fifth level
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Deriving
future
prices
Click
to edit
Master
title style
Click to edit Master text styles
16
Junlevel2011 Expiry
• Second
• Third level
Current date
Expiry
» Fourth
level Date
2011/03/02
R
2011/06/16
» Fifth level
Spot Bid
366.50
Compounding
12
Future Bid
Difference
R
R
371.31
Spot Offer
Future Offer
Difference
R
R
R
367.00
372.99
Date Diff Years
% Interest Year
% Interest Year
5.99
Future Spread Spot Spread %
R
R
1.68
1.31%
4.50%
4.81
Spot Spread
0.50
0.2904
5.59%
Future Spread %
0.14%
0.45%
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Click toCost
edit Master title style
Spread
Offer
Spreadtext styles
Click –toBid
edit= Master
Spot
Spread
• Second
level = R367.00 – R366.50 = R0.50
• Third
levelin and out
Cost of
getting
» Fourth
level
In percentage
of exposure
=
» Fifth level
2*( OFFER
( OFFER
BID )
= Spread%
BID )
R0.50/((R367.00+R366.50)/2) = 0.14%
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Click toCost
edit Master title style
Spread
Future
= R371.31
– R372.99 = R1.68
Click toSpread
edit Master
text styles
percentage
•InSecond
level of exposure =
• Third level
R1.68 /((R371.31+R372.99
)/2) = 0.45%
» Fourth level
» Fifth level
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Deriving
future
prices
Click
to edit
Master
title style
Click to edit Master text styles
• Second level
• Third level
16 Jun
2011 Expiry
» Fourth level
Current date
» Fifth level
Expiry Date
2011/03/02
Compounding
2011/06/16
12
Spot Bid
Future Bid
Difference
R
R
R
366.50
371.31
Spot Offer
Future Offer
Difference
R
R
R
367.00
372.99
Date Diff Years
% Interest Year
4.81
5.99
Future Spread Spot Spread %
R
R
1.68
4.50%
% Interest Year
Spot Spread
0.50
0.2904
5.59%
Future Spread %
0.14%
0.45%
1 Market maker
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Click to edit
Master
title style
Deriving
future
prices
Click to edit Master text styles
• Second level
• Third level
» Fourth level
» Fifth level
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Click to edit
Master
title style
Deriving
future
prices
Click to edit Master text styles
17
Mar 2011 Expiry
• Second level
• Third level
Current date
Expiry Date
» Fourth level
2011/03/02
2011/03/17
»Future
Fifth level
Bid
Spot Bid
R
366.50
R
Compounding
12
Difference
367.33
R
Spot Offer
Future Offer
Difference
R
R
R
367.00
Date Diff Years
368.05
% Interest Year
0.83
1.05
Future Spread Spot Spread %
R
R
0.72
5.52%
% Interest Year
Spot Spread
0.50
0.0411
6.97%
Future Spread %
0.14%
0.20%
10 Market maker
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Click tomaker
edit Master
Market
Doubletitle style
Click to edit Master text styles
• Second level
• Third level
» Fourth level
» Fifth level
R1.5
R1.5
R1
R99
R100
R101
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Click to edit
Master
title style
Deriving
future
prices
Click to edit Master text styles
2• Second
Marlevel
2011
• Third level
» Fourth level
» Fifth level
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Click to edit Master title style
Practice
Click to edit Master text styles
10
Mar 2011
• Second level
• Third level
» Fourth level
» Fifth level
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Click to edit
Master
title style
Deriving
future
prices
Click to edit Master text styles
17
Mar 2011 Expiry
• Second level
Current date
Expiry Date
• Third level
Compounding
2011/03/10
» Fourth level 2011/03/17
Spot Bid
R
Future
Bid
»
Fifth level
352.61 R
Spot Offer
R
Spot Spread
R
352.68 R
353.00 R
0.07
1.04%
% Interest Year
-0.15
Spot Spread %
0.32
0.0192
% Interest Year
Difference
Future
0.54 R
12
Difference
Future Offer
353.15 R
Date Diff Years
-2.21%
Future Spread %
0.15%
0.09%
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Click to edit
Master
title style
Dividend
Neutral
Contracts
Fair
= Spot
+ Cost
– Benefit
ClickValue
to edit
Master
text styles
=• Spot
+ Interest
– Div
Second
level
• Third=level
N-Contract
Spot + Interest
» Fourth level
Dividends?
» Fifth level
• AGL div assumed = 2.88 for the June Expiry
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Click to edit
Master
title style
Dividend
Neutral
Contracts
NContracts
Click
to edit Master text styles
2• Contracts
Second level
• Third
levelup front
Interest
agreed
» Fourthfor
level
Adjusts contract
dividend received in Spot
» Fifth level
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Click to
edit Master title style
Stock
Dividend
Click to edit Master text styles
• Second level
• Third level
» Fourth level
R 1,000,000
AGL
» Fifth level
R 900,000
AGL
R 100,000 = R 1,000,000
+
AGL
Dividend
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Click Flow
to edit Master title style
Price
R0.1M*(1+10%*0.5) = R 0.105M
Click to edit Master text styles
R1.05M
• Second level
R1,1M
• Third level
R1.05M-0.945M = 0.105M
R0.9M*(1+10%*0.5) = R 0.945M
» Fourth level
Value
» Fifth level
R1M
R0.9M
Adjustment down to compensate for Long holder not receiving dividend
T =0.5
TIME
T =1
T =0
R 0.1M
Dividend
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ClickPrice
to edit
Master
title style
Spot
and
CFD Cost
R 116.00
R 0.05
Click to edit Master text styles
R 114.00
• Second level
R 112.00
R 110.00
• Third level
R 0.04
» Fourth level
» Fifth level
R 0.03
R 108.00
Spot Price
CFD Cost for day
R 106.00
R 0.02
R 104.00
R 102.00
R 0.01
R 100.00
R 98.00
R01/01/2011 11/01/2011 21/01/2011 31/01/2011 10/02/2011 20/02/2011 02/03/2011 12/03/2011 22/03/2011
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Clickand
to edit
Spot
SSFMaster
Price title style
R 116.00
Click to edit Master text styles
• Second level
R 114.00
• Third level
R 112.00
R 110.00
» Fourth level
» Fifth level
Spot Price
R 108.00
SSF price
R 106.00
R 104.00
R 102.00
R 100.00
01/01/2011
11/01/2011
21/01/2011
31/01/2011
10/02/2011
20/02/2011
02/03/2011
12/03/2011
22/03/2011
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ClickComparison
to edit Master title style
Cost
R 2.50
Click to edit Master text styles
• Second level
R 2.00
• Third level
» Fourth level
R 1.50
» Fifth level
CFD Cost for day
CFD Cost over time
SSF Cost over time
R 1.00
R 0.50
R01/01/2011 11/01/2011 21/01/2011 31/01/2011 10/02/2011 20/02/2011 02/03/2011 12/03/2011 22/03/2011
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SSF: SSFs vs. CFDs
SSFs
CFDs
• Regulated by JSE/FSB
• Unregulated
• Exchanged traded product
• Trades OTC
• Expiry Date= Rollover costs
• No Expiry Date
• Set principle amount
• Principle amount could change daily
• Interest agreed upfront
• Interest fluctuates daily
• Wholesale interest rates
• Retail interest rates
• Best execution
• No best execution obligation
• Free markets
• Captive markets
• Transparent
• Opaque
• Guaranteed by SAFCOM
• Not guaranteed by SAFCOM
• No dividend paid/received
• Manufactured dividends
• Fungible financial instrument
• Not fungible
• Can take physical delivery
• 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:
Equity Derivatives Data Files:
• www.safex.co.za/ed
• www.safex.co.za/contractdata
Equity Derivatives Products:
• www.safex.co.za/mtm
• www.safex.co.za/equityindexfutures
• www.safex.co.za/marginrequirements
• www.safex.co.za/options
• www.safex.co.za/EDMstats
• www.safex.co.za/idx
• www.safex.co.za/minimums
• www.safex.co.za/ssf
• www.safex.co.za/cando
Members
• www.safex.co.za/dividendfutures
• www.safex.co.za/members
Equity Derivatives calculators:
• www.safex.co.za/margincalculator
• www.safex.co.za/bookingfeescalculator
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SSF:
Questions & Contact Details
Parking tickets!
Magnus de Wet
James Boardman
Rudolf Oosthuizen
• [email protected]
• [email protected]
• +27 11 520 7051
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