An introduction to trading via
Online Share Trading
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Comment
“I know you believe you understand
what you think I said, but I am not sure you
realise that what you heard is not what I
meant.”
Alan Greenspan – former US Fed chief.
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Agenda
What will we be covering tonight?
Introduction
Features and benefits
What is a currency future?
Pricing a currency future
Margin
Quarterly close-out
Practical example
Detailed cash flows
Risks
The Online Share Trading website
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Introduction
Standard Bank is a leader in Listed Retail Derivatives on the JSE
• By retail we mean: Derivatives for the private investor
What is a listed derivative?
• A financial instrument, traded on an exchange, the price of
which is directly dependent upon (i.e. "derived from") the
value of one or more underlying securities.
Examples of listed Retail Derivatives include
1. Warrants
2. Share Instalments
3. Single Stock Futures
4. CURRENCY FUTURES
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Features & Benefits
•
Allows RSA Citizens to hedge exposures to fluctuations in exchange rates, such
as foreign holidays and off-shore investments or simply to speculate.
•
Take a view on the currency in either direction (long or short)
•
Liquidity provided by market makers
•
The ability to input your own bids and offers
•
Traded on a regulated exchange - SAFEX
•
Reduced capital to trade (Initial margin / deposit only) thus offers gearing of up
to 10 times.
•
Cost effective brokerage rates
•
Only settles in rand, so no impact on your off-shore allowance of R2m
•
Small contract size of only 1000 units of the underlying currency (eg $1,000)
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Asset class risk profile
You are
Here
Futures
(SSF’s & currency)
Warrants
Share Instalments
Return
Small cap Stock
Blue chip Stock
Cash
Risk
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What is a Currency Future?
CF’s are agreements between two parties, where one commits to buy a set
quantity of currency and another to sell a set quantity of currency on a
specified future date.
• Each CF is based on an underlying currency (eg US Dollars).
• Each contract is worth 1000 of the underlying currency (eg $1,000).
• As the underlying price goes up and down, so does the CF.
• Profits and losses on CF’s are realised and settled on a daily basis.
• To trade in CF’s you open a futures account and deposit funds -“Margin”
• The Margin deposited earns a rate of interest as set by SAFEX.
• Quoted in rands per foreign currency (eg R6.5254 for USD1)
• Expiries March, June, September and December
• Cash settled at expiry
• NB no delivery of foreign currency!
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The FX Market
•
Largest Market in the World
•
April 2007 BIS survey USD 3.2 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
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Factors that influence FX Rates
Exchange rate determined by demand and supply
Demand and supply influenced by:
•
Economic Factors (eg Interest rates)
•
Sentiment
•
Technical Factors & Micro-structure
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Base Currency vs Quoted Currency
Exchange rate, ratio of exchange between two currencies
USD 1 = ZAR 6.6345
Euro 1 = ZAR 9.6142
Pound 1 = ZAR 13.7839
Base currency
Quoted currency
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SSF’s v Currency Futures
SSF’s
CF’s
Market made
Trade in open market *
Trade off-market (booked later)
Trade on-market - YieldX
100 shares
1000 of base currency
Physically settled
Cash settled
* Standard Bank of South Africa commits to offer liquidity by always offering a
fair bid / offer price
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Fair value of a currency future
An importer needs $1m in 3 months’ time to pay for imports -
Buy $ now, by raising funds in Rand and place it on deposit
Current spot rate USD/ZAR
3m interest rates - US
- RSA
Number of days
=
=
=
=
7.1500
5.25%
11.50%
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Today
3 months’ time
$1,000,000
$1,013,271*
R7,150,000
R7,354,999
7.1500
7.2587
FV = PV + Int
* At 360 days
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The Basis
One of the differences in price between the CF and the underlying is called the
“Basis.”
The Basis reflects a number of factors, collectively called “Carrying Costs”
(Interest).
Narrows as we near the expiry.
CF prices v spot currency prices nearing expiry
7.1500
7.1000
7.0500
7.0000
6.9500
Spot
6.9000
CF
6.8500
6.8000
6.7500
6.7000
6.6500
91
84
77
70
63
56
49
42
Days to expiry
13
35
28
21
14
7
0
Margin
Every trade that takes place on SAFEX is guaranteed by SAFEX.
By a process known as novation, SAFEX guarantees the
performance on each trade and removes the risk of
counterparties not meeting their obligations.
In order to protect itself against any particular party failing to
meet its obligations SAFEX employs a process of margining.
There are 3 types of margin:
• Initial margin
• Variation margin
• Maintenance margin
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Initial Margin
• To ensure that you meet the obligations of your trade, SAFEX requires that you
post (deposit) initial margin.
• Think of Initial margin as a “good faith” deposit.
• This money remains on deposit as long as the position is open.
• It earns a market related rate of interest.
• The initial margin is returned to the investor when the position is closed out, or
the contract expires.
• Initial margin is about 10% of the underlying value of the position.
• It is meant to equal the highest loss that may occur in a two business day
period.
• Brokers may require that clients deposit initial margin in excess of the minimum
SAFEX requirements. Online Share Trading requires an extra 50%. This is
referred to as “maintenance margin” and is discussed later.
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Margin requirements
CF
Initial Margin requirements *
Dec 07 Mar 08 Jun 08
$/R
R630
R780
R930
€/R
R968
R1185
R1395
₤/R
R1365
R1673
R1980
* Effective 12 November 2007
Includes the additional 50% requirement
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Other margins
Variation Margin
At day end, SAFEX calculates a closing price (mark-to-market “MTM”) for each
CF.
The profit or loss for the day for each position is calculated based on the MTM of
the current day less the MTM of the previous business day.
The profit or loss is referred to as the “variation margin” and is settled the next
business day into your trading account.
Online Share Trading does this calculation on a real-time basis during the course
of the business day to give clients a real-time view of the status of the portfolio.
Maintenance Margin
The minimum account balance you must maintain before your broker will force
you to deposit more funds or close out your position.
When this happens, it is known as a "margin call."
First margin call when the available cash is exhausted – simply a warning that
positions are losing cash.
Once the 50% extra initial margin is also exhausted the “Auto Close-out” occurs
and the worst performing positions are closed out first to ensure that the
available cash balance is once again a positive value.
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Quarterly close-out
CF contracts expire 2 business days before the third Wednesday of March,
June, September and December.
Expire – what does it mean?
•
•
•
Any holder of a position at the close of business on each of these days that has not
“Rolled-over” will have their position “Closed out”.
The position will be “sold” at the MTM price of the expiry day and the initial margin will be
returned.
No delivery of the base currency.
Roll-over
• The holder can request the broker to automatically convert the CF contract that is due for
expiry into a CF contract that expires in the next period.
• E.g. close out the Dec-07 contract and enter into the Mar-08 contract.
• Usually 2 days before expiry.
• The holder thus maintains the exposure.
• Brokers usually offer this at a discounted costing.
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Practical Examples
CF’s are used Primarily to:
1 - hedge (remove) the risk of existing or expected currency exposure.
2 - speculate when the belief is that currency rates will change.
Hedging
Family Planning an overseas trip,
•
•
•
•
•
•
•
•
Approximate Cost $10,000.
Buy 10 Contracts at R6.5000
Deposit R6,300 only as the initial margin
Before they fly out sell the contracts at R7.0000
Initial margin of R6,300 is returned
Profit on Hedge 10,000 x (R6.50 - R7.00)=R5,000
Buy Travellers Cheques at R7.00 cost R70,000
Net Cost R65,000
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Practical Examples cont.
Speculating
Speculator expects rand to weaken.
•
•
•
•
•
•
•
Buy 10 Contracts at R6.5000 – an exposure of R65,000
Deposit R6,300 only for the initial margin
Sell contracts at R6.7500
Profit 10,000 x (R6.75 – R6.50) = R2,500
Initial margin of R6,300 is returned
The R6,300 initial capital outlay has returned R2,500
A return of 40% during a period in which the rand only weakened by 3.8%.
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Daily cash flows – speculative example
Day 1 (trade
day)
Initial margin per
contract
CF price
MTM price
Profit / (Loss) for
the day
Net cash flow for
the day
Day 2
Day 3
Day 4
(trade)
(R6,300)
R0
R0
R6,300
R6.50
R0
R0
R6.75
R6.55
R6.62
R6.60
Irrelevant
R500 (6.55-
R700 (6.62-
(R200) (6.60-
R1,500 (6.75-
6.50x10x1000)
6.55x10x1000)
6.62x10x1000)
6.60x10x1000)
(R5,800)
R700
(R200)
R7,800
(-6300+500)
Summary of cash flows
Initial Margin
R0
(-6300 + 6300)
Variation margin
R2,500
(+500 + 700 – 200 + 1500)
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(6300+1500)
Auto close out
10 $/R DEC-07: Initial margin requirement
R630 * 10 contracts = R6,300 (R4,200 + R2,100)
Day 2 – 09:30
Day 1 (trade)
MTM price at begin of
day
Buy 10 $/R Dec-07
R6.50
MTM price at eod
R6.45
Day 2 – 12:00 Day 2 – 14:00
R6.45
R6.45
Day 2 - after
close out
R6.45
Sell 4 $/R Dec07 @ R6.21
R6.45
Live price
Cash at beginning of
day
Loss for the day
R7,000
R6.39
R200
(R500)
(6.456.50x10x1000)
(R600)
(6.396.45*10*1000)
(R2,200)
(6.236.45*10*1000)
(R2,400)
(6.216.45*10*1000)
(R2,400)
Available cash
R200
(R400)
(R2000)
(R2200)
R320
(7000-6300-
(200-600)
500)
Available before auto
close
R2,300
(200+(6300/3))
R1700
(-400+(6300/3))
R6.23
R200
R6.21
R200
R6.21
R2720 (200+2520)
(200-
2200)
2400)
R100 (-
(R100)
2000+(6300/3))
1 - At 14:00 account is in auto close out – R2200 needs to be recovered
2 - Margin balance = R6,300 (10*R630) thus 4 contracts will be sold to return
R2,520 (4*R630) into the cash balance
3 – Available cash balance now at R320
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(200-
(2200+(6300/3))
(6.216.45*10*1000)
(2720-2400)
R1580
(320+(3780/3))
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
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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
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Who may trade Currency Futures
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
•
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
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Client procedure to get started
A – Client registration
New clients
• All non-existing OST clients to register as OST client first –
securities.standardbank.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)
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The Website
How to register for an OST account
•
•
•
•
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Go to:
securities.standardbank.co.za
Click on “Open an account”
Complete the registration as an
INDIVIDUAL only.
No CF trading for non-individuals
The Website
How to register for CF trading account
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The Website
How to find a currency future
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The Website
Currency Futures > Quote Page
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The Website
Currency Futures > Trade Page
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The Website
Futures > Portoflio
A
B
C
D
E
F
G
H
I
J
K
L
M
N
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The Website cont.
Futures > Portoflio
A – Contract name: eg $/R Dec-07 means the underlying currency is USD and the
contract will expire on the 3rd Monday in December 2007.
B – Contracts held: 3 contracts long i.e. exposed to USD3,000 . Will profit if the rand
weakens.
C – Cost Price: Initial CF price at which the 3 $/R Dec-07 traded.
D – Futures Exposure: B x C. The value of the exposure of this position when initially
traded.
E – MTM price: The previous day’s official $/R Dec-07 closing price as calculated &
published by the JSE.
F – Current live SSF Bid or Offer price. The Bid price is shown for a long position as
it’s the price at which a long position holder will sell at to close a position. Visa versa
for a short position.
G – Futures Exposure: B x F. Current exposure based on the live bid or offer CF
prices.
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The Website cont.
Futures > Portoflio
H – Daily P&L: The daily profit or loss on this position
– B x (F – C) if transacted today.
– B x (F – E) for positions brought forward
I – Total P&L: G – C. The total profit or loss on this position since purchase.
J – Initial Margin: Amount withdrawn from your cash and deposited with the JSE as a
“Good Faith” deposit.
K – On expiry: Default is roll over, but you can select to expire.
L – Daily P&L: The amount used in the cash calculation is similar to the amount as
calculated in the portfolio.
M – Available trading funds: Amount that can currently be used to trade (equity or
SSF’s or CF’s). When this reaches NIL, you will be informed via SMS & e-mail.
N – value available before auto close out: M + (R2827 / 3). If the portfolio reduces by
this value, all SSF positions will be closed out.
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OST information and trading & website costs
Get more information
• Help and education section of the site
• Subscribe to the “rand futures daily” publication. See Special
announcement section to subscribe
• Or go to “Buy and Sell ideas > Latest research reports”
Trading and monthly costs
Monthly subscription fee
Equity trade costs
CF trade costs
Single stock futures costs
– R47.50*
– 0.70%*
– R20/contract*
– 0.4%
* Excl VAT
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(min R70*)
(min R70*)
(extra R70*)
OST contacts
Website: securities.standardbank.co.za
0860 121 161
E-mail:
securities@standardbank.co.za
Kurt Pagel
Ridwaan Moolla
Raoul Carelse
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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.
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Questions
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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.
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