JSE Limited ALT x Main Equity Agricultural Yield-X Board - - PowerPoint PPT Presentation

JSE Limited

ALTx Main Board Bonds

• Trading spot bonds
• Primary listings
• Secondary listings
• Carries

Interest Rate Derivatives

• Bond Futures
• Bond Options
• Index futures and
• ptions
• Rods
• Swaps
• Notes
• FRAs

Equity Derivatives Currencies

• Futures
• Options

Yield-X Agricultural Derivatives Yield-X

Yield-X What are Currency Options

• Currency Options are derivative contracts that grant the purchaser the

right but not the obligation to trade a currency futures contract at a predetermined date in the future at a prearranged price, regardless of where the underlying market is trading.

• Currency Options traded on Yield-X are based on the underlying Currency

Futures contracts on a one-to-one basis.

• Currency Options premium fluctuate with the movements in the underlying

future and volatility.

Yield-X Two types of Currency Options:

• Call Options:

Grants the purchaser the right but not the obligation to buy the underlying currency future at a predetermined price at a predetermined date in the future.

• Put Options:

Grants the purchaser the right but not the obligation to sell the underlying currency future at a predetermined price at a predetermined date in the future.

Yield-X Major components of Option Contracts:

• Expiry Date
• The underlying security
• Exercise/Strike price
• Volatility
• Premium
• Initial margin and variation margin

Yield-X Initial Margin

• Unlike Currency Futures the initial margin for Options can change as

it gets calculated on a daily basis depending on the risk of the option

• When a position is opened (either long or short), the investors are

required to pay an initial margin in cash (known as a good faith deposit) with the broker who subsequently deposits it with the clearinghouse

• This amount remains on deposit as long as the investor has an open

position

• The initial margin attracts a market related interest rate which is

refunded to the investors once the position is traded out, or if the contract expires (close out)

• The initial margin requirement varies between the different currency

futures offered

Yield-X Initial Margin

Contract Code Expiry Date Initial Margin Requirement Spread Margin Requirement Dollar/Rand ($/R) 14 September 2009 R 380.00 R 30.00 Dollar/Rand ($/R) 14 December 2009 R 385.00 R 30.00 Dollar/Rand ($/R) 15 March 2010 R 390.00 R 30.00 Dollar/Rand ($/R) 14 June 2010 R 400.00 R 30.00 Contract Code Expiry Date Initial Margin Requirement Spread Margin Requirement Euro/Rand (€/R) 14 September 2009 R 495.00 R 40.00 Euro/Rand (€/R) 14 December 2009 R 500.00 R 40.00 Euro/Rand (€/R) 15 March 2010 R 510.00 R 40.00 Euro/Rand (€/R) 14 June 2010 R 520.00 R 40.00 Contract Code Expiry Date Initial Margin Requirement Spread Margin Requirement Sterling / Rand (£/R) 14 September 2009 R 585.00 R 45.00 Sterling / Rand (£/R) 14 December 2009 R 595.00 R 45.00 Sterling / Rand (£/R) 15 March 2010 R 615.00 R 50.00 Sterling / Rand (£/R) 14 June 2010 R 605.00 R 45.00 Contract Code Expiry Date Initial Margin Requirement Spread Margin Requirement Australian Dollar / Rand (ZAAD/R) 14 September 2009 R 265.00 R 20.00 Australian Dollar / Rand (ZAAD/R) 14 December 2009 R 270.00 R 20.00 Australian Dollar / Rand (ZAAD/R) 15 March 2010 R 275.00 R 20.00 Australian Dollar / Rand (ZAAD/R) 14 June 2010 R 280.00 R 20.00

Yield-X Premium Variation Margin

• The premium is paid over the life of the Option contract.
• Variation Margin fluctuates each day, depending on the change in value of

the option

• Note, however that the Initial Margin might counter cash flows in order to

manage the risk.

• Because of daily variation margining at each day’s close the position is

fully valued for both parties, this avoids a situation where the risk exists of a default on several days.

Yield-X Currency Options listed on Yield-X

• Dollar / Rand
• Euro / Rand
• Pound / Rand
• Australian Dollar / Rand

Yield-X Options Pricing Intrinsic value of a call option Value of a put option Any extra value above intrinsic value is referred to as time value This diagram shows a simplified analysis of an option’s value.

Yield-X “In, Out and At the Money” Call Option:

• When the underlying asset’s price is higher than the

strike price a call (buy) option is said to be “in-the-money”

• When the underlying asset’s price is less than the strike price,

a call (buy) option is said to be “out-the-money”

• When the underlying asset’s price is equal to the strike

price a call (buy) option is said to be “at-the-money”

Yield-X Currency Options Product Specifications

• Underlying Instrument
• Rate of exchange between one US Dollar and SA Rand
• Standardized contracts
• Fixed expiries in March, June, September and December
• Rand Denominated
• Naked Options (premium): Rand’s per contract
• Delta trades: Volatility to 2 decimal places
• Cash Settled
• No physical delivery of foreign currency
• Contract sizes
• 1000 foreign underlying currency e.g. $ 1000, £ 1000, € 1000 and

ZAAD 1000

Yield-X Currency Options Product Specifications Cont…

• Expiry Dates & Times
• 10H00 New York time, two business days prior to the third

Wednesday of the expiry month

• Expiration Valuation Method
• 30 Iterations, arithmetic average of the underlying spot taken every

1 minute for a period of 30 minutes.

• Exercise Style
• European style, Options may be exercised only on the expiration of

the contract.

Yield-X Call Option Example: An Importer is concerned that the Rand will weaken against the

• Dollar. He needs the Rand to trade at a specific price to ensure his

production price is more than his selling price The Dollar/Rand spot exchange rate is currently trading at R9.00 and the Currency Future at R9.15 Buy “At the Money” Call Option with a strike price on the future of R9.15 and at a premium of R240 per option contract (With a Volatility

• f 25%)

Yield-X Call Option Example Cont…. Scenario 1 – Rand Weakens − On future date the Rand Currency Future is trading at R10.20 − Exercise the option and buy the Currency Futures Contract at R9.15 At Expiration: − Call Option = (Exchange Rate – strike price) x 1000 units of the underlying = (10.20 – 9.15) x 1000 = R1050 Profit = R1050 – R240 = R810

Yield-X Call Option Example Cont… Scenario 2 – Rand Strengthens − On future date the Rand Currency Future is trading at R8.50 − Why would you exercise your option and buy the future at R9.15 if you can buy it at its current future trading price of R8.50? − Loss = Premium of R240

Yield-X Put Option Example: An Exporter is concerned the Rand is going to Strengthen against the Dollar The Dollar/Rand spot exchange rate is currently trading at R9.00 and Currency Future at R9.15 Buy “At the Money” Put Option with a strike price on the future of R9.15 at a premium of R240 per option contract (With a Volatility of 25%)

Yield-X Put Option Example Cont… Scenario 1 – Rand Strengthens − On future date the Rand Currency Future is trading at R8.30 − Exercise your option and sell the rand future at R9.15 At Expiration: − Put Option = (Strike Price – Exchange rate) x 1000 units of the underlying = (9.15 – 8.30) x 1000 = R850 Profit = R850 – R240 = R610

Yield-X Put Option Example Cont… Scenario 2 – Rand Weakens − On future date the Rand is trading at R9.50 − Why would you exercise your option and sell the future at R9.15 if you can sell it at its current trading price of R9.50? − Loss = Premium of R240

Yield-X Why Trade Currency Options?

• Hedge against currency exposure risk
• Protect the value of your Currency
• Time to make sure – Buying an option enables you to defer your decision

until the option’s date of expiry

• Speculate
• Trade on a regulated and efficient platform
• Allow for transparent pricing
• Equalise the playing field for investors
• Allow individuals and smaller corporates to access favorable rates

usually reserved for larger corporates

Yield-X Risks Gearing

• Post small amount but valued on full nominal value
• Can make money but can also lose money!
• Loss can be more than the initial margin posted if unfavourable

position is not closed out Trading Hours

• Global currency markets open 24 hours a day
• 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 day’s opening of the market to trade

• ut – some banks can put stop losses in place though

Yield-X Costs

• Exchange fees to the members are R0.50 (excl VAT) per currency option

contract traded

• These are the fees the exchange charges the broking community

however the fees that the brokers charge the clients vary from broker to broker

Yield-X Currency Options Statistics Update (November 2009)

• Total number of Contracts: 846,525
• Total Contract Value: R1,1 Billion

Yield-X

QUESTIONS?