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

Yield-X JSE Limited ALT x Main Equity Agricultural Yield-X Board Derivatives Derivatives Bonds Interest Rate Derivatives Currencies -Trading spot bonds - Bond Futures - Futures - Primary listings - Bond Options - Options - Secondary listings - Index futures and - Carries options - Rods - Swaps - Notes - FRAs

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 Initial Margin Spread Margin Contract Code Expiry Date Requirement 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 Initial Margin Spread Margin Contract Code Expiry Date Requirement Requirement Euro/Rand (€/R) 14 September 2009 R 495.00 R 40.00 R 40.00 Euro/Rand (€/R) 14 December 2009 R 500.00 Euro/Rand (€/R) 15 March 2010 R 510.00 R 40.00 Euro/Rand (€/R) 14 June 2010 R 520.00 R 40.00 Initial Margin Spread Margin Contract Code Expiry Date Requirement 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 Initial Margin Spread Margin Contract Code Expiry Date Requirement 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 wi th a strike price on the future of R9.15 and at a premium of R240 per option contract (With a Volatility of 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 out – 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?