“Grow” your understanding about trading
commodity derivatives…..
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Copyright© JSE Limited 2008
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What’s up !
Purpose Of The Futures Market
Participants Of The Futures Market
Value added & Risk Of Futures Market
Role Of Hedgers And Speculators
Derivatives Products Traded
Physically settled Products
Physical Settlement Process
Cash Settled Products
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Purpose of the futures market
A trading operation that provides market participants with a
price determination mechanism and a price risk management
facility through which they can manage their exposure to
adverse price movements on the underlying physical market
and where performance by both counterparties to the
contract is guaranteed
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Who can participate in the futures market
Any individuals, foreign clients and corporate through any
JSE registered member
Any individuals, foreign clients and corporate through any
JSE registered member
Foreign Clients - participating in the physical delivery of products in the
commodities futures market are subject to Value
added tax protocol as set up by the South African
Revenue Service.
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VALUE ADDED & RISKS OF FUTURES MARKET
Price Determination Mechanisms
Management of exposure to adverse price movements
Guarantees performance by counter parties
Small initial margin leads to high exposure and profit
potential
Any given transaction can result in a loss
Losses may be greater than initial invested amount
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Role Of Hedgers And Speculators
Hedgers can be described as those market participants who
use derivative contracts to manage price risk of a underlying
commodity that is present in the physical market
• Typically a farmer producing the grains we trade, a miller who processes
the grain, a trader involved in grains market who could export or import
the product, banks involved in providing financing to the grain market
Speculators are those market participants who use derivative
contracts, not to manage price risk, but with the purpose of
benefiting from a directional move in the derivatives market
• Could be farmers who will not harvest the underlying crop as per their
derivative position, traders, retail and institutional clients
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Derivatives Products Traded
Futures contracts:
• a standardised contract for a future date that will allow a market
participant to hedge their underlying exposure in the physical market
• 100tons, of WM1 grade white maize for JULY 2010 basis Randfontein
Options contracts:
• Put Options provide the buyer the right but not the obligation to sell grain
at a specific floor price. Sellers of put options are obligated to buy grain
at the floor price
• Call Options provide the buyer the right but not the obligation to buy
grain at a specific ceiling price. Sellers of call options are obligated to
sell grain at the ceiling price
• Options expire 5 business days before moving into
the delivery month
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Future Contracts
Agricultural Products
White Maize
- Standardised contract of WM1 100metric tons
Yellow Maize
- Standardised contract of YM1 100metric tons
Wheat
- Standardised contracts of B1, B2,B3 50metric tons
Soya Beans
- Standadised contracts of class SB* 25metric tons
Sunflower Seed - Standadised contracts of FH South African Origin
50metric tons
Corn
- Standadised contracts of the underlying derivatives
contracts as traded on the Chicago Board of Trade
(CBOT)
*as defined
in the South African grading regulation of the Agricultural Products Standards Act of 1990
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Agricultural Products
Sun Flower Seeds–50
tons
White and Yellow Maize100 tons
Soya beans–25 tons
Wheat- 50 tons
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Futures Contracts
Foreign Referenced Commodity Products
Gold
- Standardise 10 troy ounce contract referencing the Gold
futures contract traded on NYMEX through its COMEX
division
Platinum - Standardise 10 troy ounce contract referencing the Platinum
futures contracts meeting all specification as listed and
traded on NYMEX, a subsidiary of the CME Group Inc
Crude Oil - Standardise 100US barrels(15898.73 liters) contracts
referencing a light sweet crude oil futures contract meeting all
specifications as listed and traded on NYMEX a subsidiary
of the CME Group Inc
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Physically Settled Products
All the agricultural products traded on the commodities
platform are physically settled except for the cash
settled Corn Contract
Since there's no transparent and a well regulated cash
market physical delivery ensures the futures contracts
closing prices reflect the true market conditions
Roughly 2% of all grain contracts traded on the JSE are
physically delivered
Derivative market therefore most often used for price
risk management
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Physical Settlement process
Is a two day settlement process, the short position holders
(seller) give notice on day one for delivery the following
business day, long position holders (buyer) are notified of
the delivery on day one
• Grain is either randomly allocated to buyers
• Alternatively an exchange for physical (EFP) will allow a buyer and seller
to negotiate the actual exchange of silo receipts
Notice day requires JSE receiving a silo receipt representing
the product
The long position holder is invoiced by the JSE the same
afternoon and is required to make full payment on delivery
day
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Physical Settlement process
There is over 18 delivery points for the seller to choose from
The final cash settlement price is discounted for location
differentials
Randfontein is used as the reference delivery point
• this is done to ensure the buyer is not placed in a worse off position
A SAFEX receipt is a recognisable tradable instruments, it
can be retendered on SAFEX a number of times when the
futures expiry expires
When a silo receipt is returned to a silo owner for out loading
of the physical product, it is finally cancelled
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Reference point
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Cash Settled Commodities
• Corn Contract
• 100 tons,
• with Mar, Jul, Sep and Dec expiries
• Crude Oil trading WTI or light sweet crude
• 100 US barrels per contract,
• with Feb, Jun, Aug and Dec expiries
• Gold
• 10 troy ounce contract,
• with Apr, Jun, Aug and Dec expiries
• Platinum
• 10 troy ounces,
• With Jan, Apr, Jul and Oct expiries
ALL THE ABOVE TRADED IN RANDS
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Final cash settlement price
Referencing NYMEX or COMEX market for FINAL futures
price
Rely on a number of iterations from both underlying
international market and the currency spot market to
eliminate market abuse by dominate participants
Markets that we reference are deep and very liquid
WTI on NYMEX and COMEX Gold are the worlds most liquid
derivative contracts
Use the dollar per ounce (or barrel) value X spot R$ exchange
rate
For more information about the cash settlement process visit
our website on http://www.safex.co.za/ap/ under products
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More Information on:
Web address:
http://www.jse.co.za/Markets/Commodity-Derivatives-Market.aspx
Email:
commodities@jse.co.za
Tel:
011 5207535
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